1.5 Theory of the Firm - LR Production/Cost

The property whereby long-run average total cost falls as the quantity of output increases.

• Economies of Scale
• Efficient Scale
• Constant Returns to Scale
• Diseconomies of Scale

The property whereby long-run average total cost rises as the quantity of output increases.

• Economies of Scale
• Effecient Scale
• Constant Returns to Scale
• Diseconomies of Scale

The property whereby long-run average total cost stays the same as the quanity of output changes.

• Constant Returns to Scale
• Economies of Scale
• Efficient Scale
• Diseconomies of Scale

Period of time in which all costs are variable.

• Long Run
• Short Run

Time period in which one of the costs is fixed?

• Long Run
• Short Run

Which levels of output are produced at the minimum possible cost per unit?

• q₁

• q₂

• q₃

• All of the above.

Use the following two statements to answer this question:

I. Increasing returns to scale cause economies of scale.

II. Economies of scale cause increasing returns to scale.

• Both I and II are true.

• I is true, and II is false.

• I is false, and II is true.

• Both I and II are false.

The LRAC (long run average cost) and LRMC (long run marginal cost) curves in the diagram below are consistent with a production function that exhibits:

• decreasing returns to scale.

• constant returns to scale.

• increasing returns to scale.

• increasing returns to scale for small levels of output, then constant returns to scale, and eventually decreasing returns to scale as output increases.

• decreasing returns to scale for small levels of output, then constant returns to scale, and eventually increasing returns to scale as output increases.

Which factors are reasons for the occurrence of economies of scale?

• Specialisation of labour and management

• Indivisibilities of capital equipment and efficient processes

• Co-ordination and monitoring difficulties

• Poor worker motivation

Which factors are reasons for the occurrence of diseconomies of scale?

• Communication difficulties

• Efficiency of capital equipment

• Co-ordination and monitoring difficulties

• Poor worker motivation