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57. There is general agreement among economists that the long–run time period exceeds one year.
a. True
b. False
58. As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the
quantity of production.
a. True
b. False
59. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or
above the long-run curve.
a. True
b. False
3344 The Costs of Production
60. Economies of scale often arise because higher production levels allow specialization among
workers.
a. True
b. False
61. If long-run average total cost is rising, then the firm is experiencing economies of scale.
a. True
b. False
62. In some cases, specialization allows larger factories to produce goods at a lower average cost
than smaller factories.
a. True
b. False
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63. The use of specialization to achieve economies of scale is one reason modern societies are as
prosperous as they are.
a. True
b. False
64. When a firm experiences economies of scale, long-run average total cost falls as the quantity of
output increases.
a. True
b. False
65. Diseconomies of scale often arise because higher production levels allow specialization among
workers.
a. True
b. False
3346 The Costs of Production
Table 13–20
Listed in the table are the long-run total costs for three different firms.
Quantity
1
2
3
4
5
Firm A
100
100
100
100
100
Firm B
100
200
300
400
500
Firm C
100
300
600
1,000
1,500
66. Refer to Table 13–20. Firm A is experiencing economies of scale.
a. True
b. False
67. Refer to Table 13–20. Firm A is experiencing constant returns to scale.
a. True
b. False
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68. Refer to Table 13–20. Firm B is experiencing constant returns to scale.
a. True
b. False
69. Refer to Table 13–20. Firm B is experiencing diseconomies of scale.
a. True
b. False
70. Refer to Table 13–20. Firm C is experiencing diseconomies of scale.
a. True
b. False
3348 The Costs of Production
71. Refer to Table 13–20. Firm C is experiencing economies of scale.
a. True
b. False
72. Adam Smith‘s example of the pin factory demonstrates that economies of scale result from
specialization.
a. True
b. False
73. Adam Smith describes a visit to a car factory when discussing economies of scale in his book An
Inquiry into the Nature and Causes of the Wealth of Nations.
a. True
b. False
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74. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
75. A key difference between accountants and economists is their different treatment of the cost of
capital. Does this cause an accountant’s estimate of total costs to be higher or lower than an
economist’s estimate? Explain.
3350 The Costs of Production
76. The production function depicts a relationship between which two variables? Also, draw a
production function that exhibits diminishing marginal product.
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77. How would a production function that exhibits decreasing marginal product affect the shape of
the total cost curve?
Explain or draw a graph.
78. What effect, if any, does diminishing marginal product have on the shape of the marginal cost
curve?
3352 The Costs of Production
79. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel
shop’s average total cost (ATC) curve as a function of the number of bagels produced. The
results indicate a U-shaped average total cost curve. Bob’s economist explains that ATC is U-
shaped for two reasons. The first is the existence of diminishing marginal product, which causes it
to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint:
The second reason relates to average fixed cost)
80. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If
the average total cost curve is rising, what is necessarily true of the marginal cost curve?
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81. According to the mathematical laws that govern the relationship between average total cost and
marginal cost, where must these two curves intersect?
Problems
1. Define profit.
2. Consider a small family wheat farm. List some examples of explicit costs of farming.
3354 The Costs of Production
3. Consider a small family wheat farm. List some examples of implicit costs of farming.
4. Can economic profit ever exceed accounting profit?
5. Briefly describe why measuring a firm’s costs is more complicated than measuring its revenues.
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6. Consider a small hair styling salon. List some examples of explicit costs of this business.
7. Consider a small hair styling salon. List some examples of implicit costs of this business.
8. Which is greater — economic profit or accounting profit?
3356 The Costs of Production
Scenario 13-21
Suppose that a small family farm sold its output for $100,000 in a given year. The family spent
$25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including
maintenance. The family members could have earned $20,000 working at other occupations.
9. Refer to Scenario 13-21. What is the accounting profit for the family farm?
10. Refer to Scenario 13-21. What is the economic profit for the family farm?