Firms in the Market Place

Suppose that it costs £10 000 to fly a jet from London to Amsterdam and the plane contains 100 passengers. If the number of passengers increases to 125, which of the following is likely to be true? The average fixed cost per passenger will fall from £100 to £80.The airline's load factor will reduce.The revenue earned by the airline will fall from £1 000 to £1 250.The airline's variable cost will fall. ExplanationThe average fixed cost per passenger is equal to the total fixed cost divided by...

The marginal cost curve cuts the average cost curve at the point where the average cost is _____. fallingat its maximumat its minimumrising ExplanationWhenever marginal cost is lower than average cost, average cost will be falling. Whenever marginal cost is higher than average cost, average cost will be rising. Therefore, the marginal cost curve has to cut the average cost curve at its minimum point.

Higher output is usually linked to increased overtime payments and greater use of temporary staff. Senior management pay is more likely to stay constant. In other words, _____ can be considered a fixed component of the total wages paid. the wages paid to temporary staffthe salaries of senior managementthe number of temporary workersthe overtime paid to workers ExplanationA fixed cost remains constant even as output increases. Since senior management pay is likely to stay constant, it can be...

For a firm to earn profits in the short run, price must be greater than both the marginal cost and average variable cost. True or False ExplanationA firm can earn profits only if the price is above the average variable cost. But firms will supply goods only at a price equal to or greater than the marginal cost. This means that the price must be greater than both the marginal cost and average variable costs for the firm to earn profits.

As long as the average variable cost of production is falling, _____. the marginal cost will also be fallingmarginal cost will be less than average variable costthe average total cost will be equal to zerothe average fixed cost will be constant ExplanationThe average-variable relationship is that so long as the average value is falling, the marginal value will be lower than the average value. Hence, when average variable costs are falling, marginal costs will be lower than average variable...

Suppose that the amount of capital and plant size are fixed for a firm. With 10 workers, it can produce 180 units of output and with 11 workers, the output produced is 190 units. Which of the following statements is true? The marginal product of the 11th worker is 18 units.When the 11th worker is hired, average product of labour is greater than marginal productThe additional unit of labour hired by the firm exhibits increasing returns.The average product of labour when 10 workers are hired is...

When the quantity of labor is increased substantially without increasing the amount of capital, the firm experiences _____. diminishing returnseconomies of scopeconstant returnseconomies of scale ExplanationThe law of diminishing returns states that, as more of a variable factor of production, usually labour, is added to a fixed factor of production, usually capital, then at some point the returns to the variable factor will diminish.

Which of the following is true of the average fixed cost for a firm? The average fixed cost is equal to total fixed cost divided by total output.The average fixed cost initially rises but then falls as output expands.The average fixed cost is the same as the variable cost when no output is produced.The average fixed cost remains constant as output expands. ExplanationAverage fixed cost is calculated as total fixed costs divided by the number of units produced.

A firm should shut down in the short run if the market price of its product doesn't cover its _____ of production. total fixed costaverage variable costaverage fixed costaverage total cost ExplanationSo long as a firm is able to cover its average variable costs, it will continue producing goods. It will be ready to forgo the recovery of fixed costs in the short run

When a firm experiences decreasing returns to scale, _____. it should expand its scale of operations to increase production efficiencyit is on the downward-sloping portion of the long-run average total cost curveits long-run average cost curve rises as output expandsan increase in all inputs will increase output proportionately ExplanationIf a firm experiences decreasing returns to scale, the long-run average cost curve rises as output expands. This is because, as the scale of the company...

If the total output of the firm is increasing in the short run, this means that _____. the fixed cost of production is equal to zerothe total revenue earned by the firm is fallingthe marginal product of the variable inputs is positivethe marginal cost of the variable inputs is zero ExplanationSince marginal product is the addition to the total output, marginal product has to be positive when total output is rising.

If supply is perfectly elastic, the value of the price elasticity of supply will be equal to _____. 0.50∞Correct1 ExplanationElasticity of supply is a measure of how responsive supply is to a change in price. When price elasticity is equal to ∞, it would mean that supply is perfectly elastic.

Which of the following statements best describes a firm's costs at a zero level of output? Both fixed costs and variable costs are zero.The firm's variable costs are zero but marginal cost is positive.Total fixed costs are zero but both marginal cost and average cost are increasing.Total variable costs are zero but total fixed costs are positive, so total costs are positive. ExplanationIn the short run, fixed costs remain constant even if output is zero. Since no output is being produced,...

If the price of steel, a primary input used in manufacturing automobiles, rises, the supply curve for the automobile industry will _____. become verticalshift to the leftbecome horizontalshift to the right ExplanationIf the costs of labour, or other inputs, increase, profits must fall. As the potential to make profits decreases, firms will be less willing to supply and so the supply curve will move in to the left.

What is meant by a product differentiation strategy? A firm merges with another company in the same line of business.A firm introduces a new product feature that other products in the market do not have.A firm reduces its costs of production by using new production technologyA firm sells its product at a price below the current market price, even if it makes a loss. ExplanationUnder a product differentiation strategy, a firm will seek a competitive advantage by making its products less...

What is meant by minimum efficient scale? The minimum efficient scale is the scale of operation of the smallest firm in the industry.The minimum efficient scale identifies the method by which a firm can produce a given level of output with minimum inputs.The minimum efficient scale is the minimum quantity that the firm can produce given the level of inputs.The minimum efficient scale is the size of operation with the lowest average cost. ExplanationThe minimum efficient scale is the minimum...

Suppose that, for country X, the labour cost per hour has remained the same while unit labour costs have increased over the past five years. Which of the following can be correctly inferred from this information? Country X has a cost advantage compared to other countries.Most of the firms in country X are operating at constant returns to scale.Wages in country X are likely to have been increasing in the past 5 years.The quantity of output produced per hour has been falling in the past 5 years....

If the marginal product of labour starts falling, this means that _____. the firm is operating at optimal capacitytask specialization is no longer economically viabletotal output is increasing at an increasing ratethe firm's variable costs are too high ExplanationTask specialization helps to raise productivity, as it results in increasing marginal product for additional workers, but after a certain point, it diminishes. There is only so much task specialization that can occur without leaving a...

The law of diminishing returns shows that, in the short run, _____. as the marginal product of labour falls, variable costs risechanges in productivity do not affect changes in costsproductivity changes in proportion to changes in fixed costsproductivity and costs change at the same rate ExplanationVariable costs rise slowly initially; then, as output increases, they begin to rise more quickly. This simply reflects the law of diminishing returns. As additional workers become less productive,...

A variable cost of production is one which _____. does not vary with output and revenueis fixed in the short runis fixed in the long runvaries with output and revenue ExplanationVariable costs change or vary with the amount of production and revenue.

A firm is said to be cost efficient if it produces output at the level where _____. its short-run average total cost is minimumits marginal cost of production is minimizedit makes the maximum profitsit maximizes sales and revenues ExplanationA firm is cost efficient if operates at the lowest point on the short-run average total cost curve.

A small firm employs only 5 workers. 4 workers produce a total of 154 units of output. With the addition of the 5th worker, output increases by 50 units. What is the total output of the firm?   100 units. 104 units. 50 units. 204 units.   ExplanationTotal product is the total output produced by a firm’s workers, which is equal to 154 + 50 units = 204 units.

An example of a fixed cost of producing a good is the _____. rent paid for the office buildingcost of raw materialswage paid to part-time workerscost of transporting the finished goods ExplanationFixed costs are constant. They remain the same whatever the level of output. Since rent has to be paid irrespective of the level of output, it is a fixed

Which one of the following statements is correct? Average variable cost equals the cost incurred in producing an additional unit of output.Average fixed cost equals total cost divided by total output.Average total cost equals total fixed cost divided by total output.Average total cost equals total costs divided by total output.Correct ExplanationAverage total cost is calculated as the total cost divided by the number of units produced.

The introduction of a new cost-saving production technology will shift the firm's short-run average cost curve downward at each level of output. True When a firm introduces a new cost-saving technology, it is able to produce the same amount of output at lower costs. This reduces the per unit cost of production, thus shifting the short-run average cost curve downward.

The difference between the short and long runA crucial difference: – Fixed costs are constant. They remain the same whatever the level of output. – Variable costs change or vary with the amount of production.How do you manage costs which do not vary with the level of output?The difference between variable, fixed and total costs.In the SHORT RUN, one factor of production is fixed. In the LONG RUN, all factors of production are variable. How costs vary with output differs between the short run...