1. To minimize average cost, a firm should always operate at the minimum Margina
ID: 1166790 • Letter: 1
Question
1. To minimize average cost, a firm should always operate at the minimum Marginal Cost. (True or False?)
2. The idea that given at least one fixed input, there exists an optimal level of some other variable input, beyond which each additional unit of the variable input produces fewer and fewer units of output is referred to as:
a) economies of scale
b) marginal costs
c) minimum efficient scale
d) diminishing (marginal) returns
3. Assume that both labor and capital exhibit diminishing returns. Suppose you can hire an additional unit of labor for $10, and she can product 50 units. You could also buy an additional machine at the cost of $200, and that machine would allow you to produce 1000 units.
If your main concern is minimizing average cost, what should you do?
a) Buy the machine, because it will allow you to produce more
b) Nothing, because you are already minimizing cost
c) There is not enough information to make a legitimate response
d) Hire more labor, because it is cheaper
4. Assume that both labor and capital exhibit diminishing returns. Suppose you can hire an additional unit of labor for $5, and she can product 50 units. You could also buy an additional machine at the cost of $200, and that machine would allow you to produce 1000 units.
If your main concern is minimizing average cost, what should you do?
a) Hire more labor, because it is cheaper
b) Buy the machine, because it will allow you to produce more
c) Do nothing, because you've already minimized costs
d) There is not enough information to make a legitimate response
5. Last year, you spent $10,000 researching the market to decide whether to begin a new business. You rent a space for $40,000 a year, and pay an employee $50,000 a year with a 1 year contract.
If you could earn $100,000 in another occupation, and you sell 5000 units which cost $2 to produce, which of the following correctly characterizes your costs?
a) Your total economic costs (explicit and implicit) are $210,000
b) Your total economic costs (explicit and implicit) are $200,000
c) Your explicit variable costs are $200,000
d) Your explicit fixed costs are $100,000
Explanation / Answer
1. MC curve is upward sloping when it intersects AC at it's minimum point. As long as MC is less than ATC, ATC will go down with each extra unit produced. At some point MC starts rising and rises to the point where it is equals AC and intersects with AC at it's minimum point. So, to minimize AC, a firm should operate at the rising portion of MC and not at the minimum point. At the minimum point of MC, AC will be decreasing but not minimized.
The statement is therefore False.
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