RELATED CONCEPTS:|ACCOUNTING PROFIT |AVERAGE VARIABLE, FIXED, AND TOTAL COSTS |CONSTANT RETURN TO SCALE |DISECONOMIES OF SCALE |ECONOMIC PROFIT |ECONOMIES OF SCALE |EXPLICIT COSTS |IMPLICIT COSTS |LAW OF DIMINISHING MARGINAL RETURNS |LONG AND SHORT RUN |LONG-RUN AVEAGE COST|MARGINAL COST |MARGINAL PHYSICAL PRODUCT |TOTAL COST |TOTAL FIXED COSTS |TOTAL VARIABLE COSTS |.
Why are average costs lowest in the long run?
- Because the firm can then select the scale of plant and the amount of equipment that is most efficient for each level of output.
What is happening to the marginal productivity of workers as marginal costs fall?
- MPP is increasing, meaning it takes less labor units to produce each unit of output.
Why do marginal costs rise?
- Because MPP increases due to the law of diminishing marginal returns, each added unit of output requires more labor units to produce and so, a higher marginal cost.
Is the law of diminishing marginal returns true when all inputs are increased together?
- No. It holds true only when some inputs are not increased.
How is the total variable cost curve derived from the marginal cost curve?
- TVC is the sum of the MCs.
How is the total cost curve derived from the total variable cost curve?
- TC is derived by adding fixed costs to TVC.
When MC less than AVC, how will AVC change when output is increased?
- AVC will fall.
How is MC related to AVC and ATC at their respective minimum values?
- MC = AVC at AVC’s minimum. MC = ATC at ATC’s minimum.
Why does the ATC fall when the firm is experiencing economies of scale?
- ATC falls since each added unit of output costs less since less added inputs are needed to produce it.
Why would a firm be better off not producing when its economics profits are negative?
- Because then it would be better off investing its time and capital elsewhere. Total costs equal the opportunity cost (i.e., the forgone revenues) of the best alternative. If the firm earns less, it’s better off with the alternative.
Copyright 2008 by Sujanto Rusli
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