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Chapter 11: Problem 6

Suppose a firm has no fixed costs, so all its costs are variable, even in the short run. a. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape? Briefly explain. b. If the firm's marginal costs are \(\$ 5\) at every level of output, what shape will the firm's average total cost have?

Short Answer

Expert verified
a. Yes, the firm's average total cost curve will have a U shape in the scenario of continually increasing marginal costs. b. If the firm's marginal cost is constant at every level of output, the average total cost curve will be a straight line, not a U shape.

Step by step solution

01

Understanding the relationship between marginal cost and average total cost

There's a relationship between marginal costs and average total costs. Whenever marginal cost is less than average total cost, the average total cost declines. Whenever marginal cost is more than average total cost, the average total cost increases. And finally, when marginal cost equals average total cost, the average total cost is at its minimum point.
02

Analyzing the first scenario

Given that the firm's marginal costs are continually increasing. This means the marginal cost is more than average total cost after some levels of output. According to the guiding principle we discussed in the first step, the average total costs will start to increase and hence, the average total cost curve will have a U shape.
03

Analyzing the second scenario

In the second scenario, the firm's marginal cost remains constant at \(\$5\) for every level of output. Here, since the marginal cost is not changing with the level of output, the average total cost will also remain same, disallowing it to be higher or lower than marginal cost. This means that the average total cost curve will be a downward sloping straight line, not a U shape.

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Most popular questions from this chapter

In describing the optimal size of an investment fund, a writer for the Wall Street Journal observed: … at first, bigger is better for both investors and managers…. Managing money is expensive. Small funds have many fixed costs…. If a fund is small, it can’t generate enough fees to cover costs…. The result is that in terms of performance, funds should want to get big to cover costs and maximize returns, but not so big that diseconomies of scale erode returns. Draw a graph of a long-run average cost curve for a typical firm in the investment fund industry. In your graph, draw and label the following. a. A short-run average total cost curve for an investment fund that has not reached minimum efficient scale b. A short-run average total cost curve for an investment fund that has reached minimum efficient scale c. A short-run average total cost curve for an investment fund that experiences diseconomies of scale d. A range of output within which investment funds experience constant returns to scale

Suppose that Henry Ford had continued to experience economies of scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.

What is the difference between technology and technological change?

In recent years, the United States has experienced large increases in oil production due in large part to a new technology, hydraulic fracturing ("fracking"). Fracking involves injecting a mixture of water, sand, and chemicals into rock formations at high pressure to release oil and natural gas. An article in the Wall Street Journal indicates that economies of scale in fracking may be considerably smaller than in conventional oil drilling. If this view is correct, what would the likely consequences be for the number of firms drilling for oil in the United States?

What is the production function? What does the shortrun production function hold constant?
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