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Understanding Cost Curves and Economies of Scale

The document consists of a problem set focused on economic concepts such as marginal product, costs, and economies of scale. It includes questions on defining key terms, drawing cost curves, and analyzing the differences between short-run and long-run average total cost curves. Additionally, it provides a matching exercise related to types of economies of scale and their practical applications in firms.

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3 views2 pages

Understanding Cost Curves and Economies of Scale

The document consists of a problem set focused on economic concepts such as marginal product, costs, and economies of scale. It includes questions on defining key terms, drawing cost curves, and analyzing the differences between short-run and long-run average total cost curves. Additionally, it provides a matching exercise related to types of economies of scale and their practical applications in firms.

Uploaded by

ronaldrideout1000
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem Set

Question 1

a) What is marginal product, and what does it mean if it is diminishing?


b) Explain the difference between economic and accounting costs.
c) Define total cost, average total cost, and marginal cost.
d) Draw the marginal cost (MC) and average total cost (AC) curves for a typical firm.
e) Explain why the AC and MC curves have the shapes that they do and why they cross
where they do.

Question 2

Fill in the columns of Total Cost, Variable Cost, Average Fixed Cost, Average Variable Cost,
Average Total Cost and Marginal Cost.

Average Average Average


Total Fixed Variable Fixed Variable Total Marginal
Output Cost Cost Cost Cost Cost Cost Cost
0 €4.00 €4.00 €0 --- --- --- ---
1 €1 € 4.00 € 1.00 € 5.00 € 1.00
2 € 1.3
3 € 1.5
4 € 1.9
5 € 2.8
6 € 4.5
7 €7
8 € 10.5
9 € 14.8
10 € 20

a) Draw the schedule of Average Fixed Cost, Average Variable Cost, Average Total Cost
and Marginal Cost.
b) Comment on the shape of the cost curves and the relationship between them.

Question 3
How and why does a firm’s average total cost curve differ in the short run and in the long
run? Explain using relevant diagrams.

Question 4
a) Define economies of scale and explain why they might arise.
b) Define diseconomies of scale and explain why they might arise.
Question 5
The following is a list of various types of economies of scale:

I. The firm can benefit from the specialisation and division of labour.
II. It can obtain inputs at a lower price.
III. Large containers/machines have a greater capacity relative to their surface area.
IV. The firm may be able to obtain finance at lower cost.
V. It becomes economical to sell by-products.
VI. Production can take place in integrated plants.

Match each of the following examples for a particular firm to one of these types of economy
of scale.
It can more easily make a public issue of shares.
Workers spend less time having to train for a wide variety of different tasks,
and less time moving from task to task.
It negotiates bulk discount with a supplier of raw materials.
It uses large warehouses to store its raw materials and finished goods.
A clothing manufacturer does a deal to supply a soft toy manufacturer with
offcuts for stuffing toys.
Conveyor belts transfer the product through several stages of the
manufacturing process.

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