Reading 17: Output and Costs

LOS a: Differentiate between short-run and long-run decision time frames

1.A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?

A)   Average variable cost.

B)   Average total cost.

C)   Marginal cost.

D)   Average fixed cost.

The correct answer was D)

A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost.