CHAPTER SEVEN
Answers to Self Test Questions
1.
A) The Total Cost column is:
TC
$5000
25 000
45 000
60 000
90 000
125 000
195 000
297 500
1500 (since this is minimum AC).
B) $5 000 (the amount of cost when output is zero).
C) Horizontal, since economic capacity of Plant 2 is at an output which is exactly twice that of Plant 1’s
economic capacity.
2.
A) Constant returns to scale.
B) Increasing returns to scale.
C) Increasing returns to scale.
3.
A) Increase to 1200.
B) Increase to an amount greater than 1200.
C) Increase to an amount greater than 1200.
4.
A) See Figure AK 26
Q1
Quality of output
Figure AK 26
B) If constant returns to scale exist at the minimum point of the short-run AC curve, yes; if
increasing returns to scale exist, no.
37
Answers to Study Guide Questions
Are You Sure?
1.
2.
3.
4.
5.
6.
7.
8.
False: all inputs are variable.
True.
True.
False: output increases by a larger percentage than do inputs.
False: it could decline but it could also be horizontal or rise.
False: these are examples of technical economies of scale.
True.
False: economic capacity is where the ATC is at a minimum; the most
productive point is where AVC is at a minimum.
9. True.
10. False: the minimum point on its long-run average cost curve.
Choose the Best
11. a
12. a
13. b
14. c
15. b
16. b
17. c
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
c
b
d
c
b
a
b
Problems
31. a) Plant 2
b) 400
c) Plant 3
32. a)
b)
c)
d)
They are all capacity outputs of the various plant sizes.
Plant 4.
200 and 600.
There is no evidence of decreasing returns to scale.
33. a)
b)
c)
d)
They are constant.
No.
120 workers and 300 units of capital.
100.
34.
Figure AK 27
38
a
c
e
b
c
d
Translations
Q1
Q2
Q3
Q4
Q5
Quantity of output
Figure AK 28
Key Problem
a) See Figure AK 29
20
40
60
80
100
120
140
Quantity of output
Figure AK 29
b) It is easiest to answer this question by referring to the data in Table AK 24, although the answers could
also be read off the graph.
Table AK 29
Output
30
40
50
60
70
80
90
100
110
120
Plant
1
2
2
3
3
3
4
4
5
5
39
c)
See Figure AK 29
d) Minimum efficient scale is the smallest level of output at which a firm is able to minimize long-run
average cost. This is achieved in plant 3.
e)
Minimum long-run average cost is achieved at an output of 70.
f)
Yes, excess capacity exists because an output of 80 is below the output (90) at which minimum average
cost of $4 is achieved.
g)
Economic capacity is at an output of 110 where short-run average costs are minimized.
h) Between the outputs of 0 and 70, where long-run average costs are declining.
i)
Between the outputs of 71 and 90, where long-run average costs are constant.
j)
Above the output of 90, where long-run average costs are increasing.
k) The market is too small for plant sizes 3, 4 and 5 since all have economic capacity at outputs above 50.
More of the Same
a)
See Figure AK 30
4
8
12
16
20
24
Quality of output
Figure AK 30
b)
Output:
Plants
c)
4
1
6
2
8
2
10
3
12
3
14
4
See Figure AK 30
d) 4.
e)
16.
f)
Yes.
g) 8.
h) 4 and 16.
i)
16 and 20.
j)
There is no evidence of decreasing returns to scale..
k) 16 in plant 4 (the minimum efficient plant size)
40
16
4
18
4 or 5
20
5
22
5
24
5