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LOS d: Explain the firm’s production function, its properties of diminishing returns and diminishing marginal product of capital, the relation between short-run and long-run costs, and how economies and diseconomies of scale affect long-run costs.

The law of diminishing returns states that for a given production process, as more and more of a resource (such as labor) are added, holding the quantities of other resources fixed:

A)	cost declines at a decreasing rate.

B)	cost declines at an increasing rate.

C)	output increases at a decreasing rate.

The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added holding the quantities of other resources fixed, output increases at a decreasing rate. This occurs because, at some point, adding more workers results in inefficiencies.

A)	less of a resource are devoted to production, holding the quantity of other inputs constant, the output will decrease, but at an increasing rate.

B)	more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate.

C)	more of a resource is devoted to production, holding the quantity of other inputs constant, at some point output will begin to decrease.

At low levels of output, increasing marginal returns will exist corresponding to the downward sloping portion of the marginal cost curve. As marginal costs begin to increase diminishing marginal returns will occur.

Which of the following is least accurate with regard to the long-run and the short-run?

A)	In the short run, only plant size is fixed.

B)	Long-run cost curves pertain to plants of different sizes.

C)	In the long-run, all costs are variable.

In the short-run, labor is major variable cost. Plant size, in addition to technology and equipment, are fixed.

Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually:

A)	rise at an increasing rate.

B)	fall at a decreasing rate.

C)	rise at a decreasing rate.

The law of diminishing returns states that as more variable resources are a production process combined with a fixed input, output will eventually increase at a decreasing rate. In the short run, as the quantity produced rises, costs rise at an increasing rate.

According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely result in:

A)	increasing the total sales of the firm and reducing the average sales per salesperson.

B)	decreasing the total sales of the firm as a result of competition amongst salespeople.

C)	doubling the total sales of the firm.

The law of diminishing returns states that as more of a resource is added to a production process, holding other resource use constant, increases in output will eventually decrease. Therefore, as more salespeople are added they will generate more sales at a decreasing rate. Total sales will increase and the average sales per salesperson will decrease.

The graph of two long run average total cost (LRATC) curves for a typical company appears below.

A)	The ideal plant size is indicated by point M.

B)	The use of improved technology may have caused the company to move from LRATC₁ to LRATC₂.

C)	At point L, the company is experiencing economies of scale.

The use of improved technology would likely result in decreased costs and a downward shift in the LRATC. An upward shift in the LRATC curve may result from increased taxes, increased resource prices, or new government regulations, as these actions likely increase costs.

The other statements are true. Note: At point H, the firm is experiencing diseconomies of scale.

At a fixed level of capital, output increases as the quantity of labor increases, but at a decreasing rate. This phenomenon is an example of:

A)	law of diminishing returns to labor.

B)	law of diminishing costs to labor.

C)	law of diminishing returns to capital.

The law of diminishing returns states that at some point, as more and more of a resource (e.g., labor) is devoted to a production process, holding the quantity of other inputs constant, the output increases, but at a decreasing rate.

Which of the following statements regarding diminishing marginal returns is most accurate?

A)	As the quantity produced rises, costs begin to rise at an increasing rate.

B)	As the quantity produced rises, costs begin to rise at a decreasing rate.

C)	The total cost curve arches downward.

At production levels that are consistent with decreasing marginal returns, costs will increase at an increasing rate as production rises.

Holding the quantity of labor constant, output increases as the quantity of capital increases, but at a decreasing rate. This phenomenon is most accurately described as:

A)	diminishing marginal costs of capital.

B)	diminishing average returns to capital.

C)	diminishing marginal product of capital.

The marginal product of capital is the change in output divided by a unit change in capital, holding labor constant. Diminishing marginal product of capital means that at a constant level of labor, output increases as capital is added, but at a decreasing rate.

The upward sloping segment of a long-run average total cost curve represents the existence of:

Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents constant returns to scale.

Which of the following most accurately describes economies of scale? Economies of scale:

A)	occur when long-run unit costs fall as output increases.

B)	increase at a decreasing rate.

C)	are dependent on short-run average costs.

Economies of scale occur when the percentage increase in output is greater than the percentage increase in the cost of all inputs. Economies of scale occur over the range where the long-run average cost curve slopes downward.

Which of the following most accurately describes the relationship between the slope of a firm’s long-run average total cost (LRATC) curve and scale economies?

Diseconomies of scale

Economies of scale

Diseconomies of scale

Economies of scale

The downward sloping segment of the LRATC cost curve covers the output range where economies of scale exist because per unit costs decrease as output increases. The upward sloping segment of the LRATC curve is where diseconomies of scale are present because costs rise as output increases.