You must read each slide, and complete any questions on the slide, in sequence.
Question 1 of 3
Question
1.
Along the firm's short run average total cost curve, the amount of capital used is assumed to be fixed. What might explain the curve's shape?
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B.
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D.
100
Correct! Along the firm’s short run average total cost curve, the per unit cost of production is initially decreasing, reaches its minimum and then increases. This is due to the increasing returns to labor experienced at low levels, where the addition of each new worker increases the marginal product of labor. Eventually the marginal product of labor decreases with the addition of new workers and the per unit cost of production then begins to increase.
Incorrect! Along the firm’s short run average total cost curve, the per unit cost of production is initially decreasing, reaches its minimum and then increases. This is due to the increasing returns to labor experienced at low levels, where the addition of each new worker increases the marginal product of labor. Eventually the marginal product of labor decreases with the addition of new workers and the per unit cost of production then begins to increase.
Question
2.
Consider the eFigure graph that illustrates that firm's three short-run average total cost curves, ATCSR,10,ATCSR,20, and ATCSR,30. Assume that Ivor's Engines is interested in producing 19 engines. Please use the graph to determine the per unit cost of production, ordering the three short-run average total cost curves from lowerst per unit cost to highest per unit cost.
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B.
C.
D.
100
Correct! To produce 19 engines, the firm is operating at a point just to the left of Y. The lowest per unit cost of production is on curve ATCSR,20, at approximately $9. Above that, on the ATCSR,10 curve, the per unit cost is approximately $12 per engine. Finally, above that, on the ATCSR,30 curve, the per unit cost is approximately $13. Given these three short run average total cost curves, the firm can produce 19 engines most cheaply by operating on ATCSR,20.
Incorrect! To produce 19 engines, the firm is operating at a point just to the left of Y. The lowest per unit cost of production is on curve ATCSR,20, at approximately $9. Above that, on the ATCSR,10 curve, the per unit cost is approximately $12 per engine. Finally, above that, on the ATCSR,30 curve, the per unit cost is approximately $13. Given these three short run average total cost curves, the firm can produce 19 engines most cheaply by operating on ATCSR,20.
Question
3.
Consider Ivor’s Engines’ long run average total cost curve, ATCLR, represents the lowest per unit cost of production for any quantity of output. What is this curve?
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B.
C.
D.
100
Correct! The envelope curve, ATCLR, is the collection of points that represent the lowest per unit cost of production for each level of output. They correspond to points on the short run average total cost curves, but they are not the minimum points of these curves. For example, points X and Z are on individual short run average total cost curves, but they are not the minimum points of these curves. Only point Y is the minimum of ATCSR,20. Point Y is also the minimum of the long run average total cost curve.
Incorrect. The envelope curve, ATCLR, is the collection of points that represent the lowest per unit cost of production for each level of output. They correspond to points on the short run average total cost curves, but they are not the minimum points of these curves. For example, points X and Z are on individual short run average total cost curves, but they are not the minimum points of these curves. Only point Y is the minimum of ATCSR,20. Point Y is also the minimum of the long run average total cost curve.