20) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, they are
able to buy inputs in bulk, resulting in lower input prices. It is likely that continued growth will
result in
A) economies of scale.
B) Gigantic Company achieving the minimum efficient scale of production.
C) diseconomies of scale.
D) increasing marginal returns.
21) A firm scaled up its operation by increasing all inputs by 100%. If the firm experienced
150% increase in the output, the firm’s long-run average cost exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.
22) A firm scaled down its operation by reducing all inputs by 50% and experienced a more-
than-50% decrease in output. If all input prices remain unchanged, the firm’s long-run average
cost exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.
23) When the firm increases output and the costs rise disproportionately faster, then the long-run
average cost curve is ________ and the firm is experiencing ________.
A) horizontal; constant returns to scale
B) downward sloping; constant returns to scale
C) upward sloping; diseconomies of scale
D) downward sloping; economies of scale
24) Under which conditions might diseconomies of scale result?
A) improved coordination brought about by bureaucracy
B) decreasing costs of inputs
C) increasing output prices
D) increased bureaucracy
25) Under which conditions might diseconomies of scale result?
A) improved coordination brought about by bureaucracy
B) increasing price of inputs
C) increasing output prices
D) usage of a large amount of indivisible inputs by the firm
26) Under which conditions might diseconomies of scale result?
A) hampered coordination brought about by bureaucracy
B) decreasing costs of inputs
C) increasing output prices
D) usage of a large amount of indivisible inputs by the firm
27) Coordination problems in large firms might lead to
A) horizontal marginal cost curves.
B) downward-sloping marginal cost curves.
C) upward-sloping short-run average cost curves.
D) upward-sloping long-run average cost curves.
28) Higher input prices in large firms might lead to
A) horizontal marginal cost curves.
B) downward-sloping marginal cost curves.
C) downward-sloping long-run average cost curves.
D) upward-sloping long-run average cost curves.
29) Suppose that in 2012 MBI Corp. produced 100 million units of a good at an average cost of
$6, and in 2013 MBI Corp. expanded its plant capacity and produced 200 million units at an
average cost of $6.20. In this range, one can conclude that MBI Corp. is experiencing
A) economies of scale.
B) diseconomies of scale.
C) neither economies of scale or diseconomies of scale.
D) increasing marginal product.
30) Under which conditions might diseconomies of scale result?
A) hampered coordination brought about by bureaucracy
B) increasing costs of inputs
C) the firm uses a large amount of indivisible inputs
D) both A and B
31) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows,
coordination of work teams is becoming more difficult because of increased bureaucracy. It is
likely that continued growth will result in
A) economies of scale.
B) Gigantic Company achieving the minimum efficient scale of production.
C) diseconomies of scale.
D) increasing marginal returns.
32) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, demand
for inputs causes input prices to rise. It is likely that continued growth will result in
A) economies of scale.
B) reduced fixed costs.
C) diseconomies of scale.
D) increasing marginal returns.
33) A firm doubled all its inputs and experienced a 50% increase in output. If all input prices
remain unchanged, the firm’s long-run average cost exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.
34) A firm scaled down its operation by reducing all inputs by 50% and experienced a less-than-
50% decrease in output. If all input prices remain unchanged, the firm’s long-run average cost
exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.
35) If the firm is producing in the long run, then the firm’s average total cost curve
A) equals the average variable cost curve.
B) is less than the average variable cost curve.
C) exceeds the average variable cost curve.
D) equals zero.
Recall the Application about the manufacture of fake killer whales used to scare sea lions
off the Washington coast to answer the following question(s).
36) Recall the Application. If a fake killer whale to be used to scare sea lions away from
steelhead and other threatened and commercially valuable species cost $11,000 for the mold and
$5,000 for materials for each fake killer whale made, then the average or unit cost of producing
five fake killer whales would be
A) $5,000.
B) $7,200.
C) $11,000.
D) $16,000.
37) Recall the Application. If a fake killer whale to be used to scare sea lions away from
steelhead and other threatened and commercially valuable species cost $11,000 for the mold and
$5,000 for materials for each fake killer whale made, then the producer would face
A) increasing returns to scale.
B) decreasing returns to scale.
C) increasing average total costs.
D) decreasing demand.
38) When the long-run average total cost curve is horizontal, a firm has economies of scale.
39) The long-run marginal cost is the additional cost incurred by the firm when producing one
more unit of output, holding the amount of capital constant.
40) A large blast furnace is an example of an indivisible input that cannot be scaled down to
reduce output.
41) If a firm has reached the minimum efficient scale, any additional output produced by the firm
will result in a lower average cost in the long run.
42) A firm reaches the minimum efficient scale in the short run.
43) The minimum efficient scale is the output at which the long-run average cost curve becomes
horizontal.
44) If the long-run average total cost curve is rising as output increases, then the firm faces
diseconomies of scale.
45) A U-shaped long-run average cost curve implies that a firm faces only diseconomies of scale.
Recall the Application about the manufacture of fake killer whales used to scare sea lions
off the Washington coast to answer the following question(s).
46) Recall the Application. The mold used to produce the fake killer whales is an indivisible
input.
47) Can a firm experience diminishing returns in the long run?
48) What are indivisible inputs and what are their implications for economies of scale?
49) Why are some long-run average cost curves steeper on the downward side than others?
50) Draw a graph showing the long-run average cost curve for a firm that experiences economies
of scale.
51) Explain why some firms may suffer diseconomies of scale.
Recall the Application about the manufacture of fake killer whales used to scare sea lions
off the Washington coast to answer the following question(s).
52) Recall the Application. What is the indivisible input and what are its implications for
economies or diseconomies of scale?
5.4 Examples of Production Cost
1) Since a large or a small wind turbine have similar installation, operating and maintenance
costs, but a large turbine has four times the generating capacity but costs less than three times as
much as a small turbine, the average cost of generating electricity with wind is
A) constant at each output.
B) increasing as output increases.
C) decreasing as output increases.
D) at first decreasing and then increasing as output rises.
2) Since a large or a small wind turbine have the same installation, operating and maintenance
costs, but a large turbine has four times the generating capacity but costs less than three times as
much as a small turbine, the wind power industry faces
A) constant economies of scale.
B) economies of scale.
C) diseconomies of scale.
D) a hump shaped cost curve.
3) If the first copy cost of a music video is $223,000 and the marginal cost is $0, how much total
cost would the firm incur if it produces 1 million copies?
A) zero
B) $223,000
C) $1 million
D) $1 million + $223,000
4) If the first copy cost of a music video is $223,000 and the marginal cost is $0, then how many
copies should the firm sell in order to break even if the price was $10 each?
A) zero
B) 2,230
C) 22,300
D) 223,000
5) If the first copy cost of a music video is $223,000 and the marginal cost is $0, then as the firm
produces an infinite quantity of the video, the average total cost of producing the video will
approach
A) zero.
B) $1.00.
C) $2,230.
D) $1 million.
6) A tax levied on coal-fired plants that is based on the amount of carbon released in the
atmosphere is considered by the firm as a
A) variable cost.
B) fixed cost.
C) source of revenue
D) sunk cost.
7) From 1998 to 2010, the cost of electricity produced with nuclear power has ________ and the
cost of electricity produced with solar power has ________.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
8) Suppose that the only input used in the generation of solar energy is sunlight and has a zero
cost. The average total cost of producing electricity is
A) zero.
B) equal to the marginal cost.
C) equal to the average fixed cost.
D) immeasurably high.
9) Since a large or small wind turbine have the same installation, operating and maintenance
costs, but a large turbine has four times the generating capacity but costs less than three times as
much as a small turbine, the wind power industry faces decreasing returns to scale.
10) Information goods such as a music video have an L-shaped average cost curve.
11) Why does wind power have economies of scale?
12) Does the text suggest that the falling prices in solar power generation come from economies
of scale?