I l l l l l l l l l l r

m i c r o e c o n o m i c S

'

l l ,
l l l l l l l l l
l l l l l

④
"

Give a short definition

"
of " constant returns to
"
scale , " increasing returns

to scale and " decreasing returns to scale .

Quantitative firm
Constant returns to scale
change in output of
=
a or

"
industry resulting from a
proportionate
If input doubles , output doubles increase in all
inputs
"
.

returns to scale by
Increasing If the
quantity of output rises greater
=
a

proportion e
g. if output increases
by 2.5
-

"

" If input doubles , output increases times in response to a

doubling of all inputs .

Decreasing returns to scale =

Occur if the production process becomes less
efficient as production is expanded , as when
"

input doubles , output decreases managed

effectively
If firm becomes too
" a
large to be
unit
single as a .

⑤ Show graphic all explain briefly

and the cost
minimizing condition for a
given
output and
given input prices .

K ( capital )

Gg Ppg
GPL G Pk
Wy
cost = =
= =
minimization
w r
,

optimal choice cost is minimized at the levels of capital

and labor such that the
marginal product
is
-

of labor divided Cw)

by
-

the equal
-
-

wage
-

•
'
Isoquant
divided
to the marginal product of capital
'

boost Line
! by the rental price of capital Crl .

L ( labor )

④ What are
marginal cost ,
variable cost and fixed cost ? What determine 's a firms decision
to shut down production or to exit a market ?
A VC
cost IMC ) increase in cost
MC
Marginal resulting by the production of one additional
AVC unit of output Variable cost CVC ) Fixed cost CFC ) do
.
vary as output varies .

not vary with the level of output and can

only be eliminated by shutting down .

0
variable cost ( AVC) the firm should shut
-

If
- - - - - - ' '

cost
i '

are below
marginal average
down ✓ exit the market, be caus the firm can't cover it 's fixed costs or
Q is
variable costs ,
so therefor even an extra unit an additional loss .
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m i c r o e c o n o m i c S

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l l ,
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④ what are
marginal costs ,
average
total costs ,
average variable cost and
fixed costs ?
average
cost CMC )
Marginal Increase in cost
resulting from the production of
=
one

extra unit of output .

total cost CAT C) Firms total cost derided by it 's level of output
Average
=

Average variable cost (AVC) Variable cost divided by the level of output
=

fixed cost (AFC) Fixed cost decided the level

Average by of output
=

④ what determines
marginal costs in a
perfectly competitive market ?

to be
In a
perfectly competitive markets , firms decide the
quantity
produced based on marginal costs and sale price If the sale price is .

higher than the marginal cost then they produce the unit and supply it If ,
.

the would not be profitable

marginal cost is
higher than the price ,
it to

produce it .

① Explain the terms

accounting cost , economic cost and sunk cost .

Accounting cost Actual expenses plus depreciation charges cabschreibungen )

=

for capital equipment .

Economic cost Cost to firm of

utilizing in
=
a economic resources

production ( unlike
accounting cost , economic cost is also
)
including opportunity cost

sunk cost =
Expenditure that has been made cannot be recover
→
should not influence the firms decision
software ( large amount of
industry money spent
→ e.
g .

to develop new applications )

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④ Assume that in the short -

run the
quantity of capital is
given and that
an increase in output can only be achieved by using more labor . Show

graphically and explain briefly why short run

marginal cost exceeds
long run
-
-

cost
marginal .

TOTAL OUTPUT

Long -
run

MC
Diminishing
•

'
>
Law of
diminishing returns >

marginal returns
•

i ,
l l

l l
i
diminishing i
short -
run
, returns
,
most '
l
l Negative
productive
,
,
returns
,

! i MP
'
. ' '

TOTAL INPUT
0 I II III II I

The law of
diminishing marginal returns is an economic
theory that predicts
that after some optimal level of reached additional factor
capacity is , adding an)
of production ( in this case the
increasing amount of labor will
actually
result in smaller increases in output law in the short
The
only occurs run
-

when one factor is fixed C in this case capital ) .

In our example labour is increased in the short -

run which led to a point where
the
marginal product decreases and late on also the average product .

all for
In the
long -
run factors are variable and the law doesn't
apply There .

the short exceed the

run
marginal cost
long run
marginal cost
-
-

④ Explain the term economies of scale . What are the reasons for economies of scale ?

AC per unit Economies of scale =

when more units of a
good or service
can be produced on a
large scale , yet with fewer input costs ,

. . . . . . . @
geco nfsmciaese cost
Curve
economies

Reasons :
of scale are said to be achieved .

→
specialization of labor and integrated technology boost
'

more
- - . -
.
i . . . . . o (dis economies
'

I
: of scale production volumes
,

i Bulk orders from suppliers larger advertising buys lower cost of

'
→
,
,
,
i
!
Q capital
→
spreading internal function costs across more units produced
and sold helps to reduce costs .
 I l l l l l l l l l l r

m i c r o e c o n o m i c S

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l l ,
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⑧ Define fixed costs variable cost ,

and
marginal cost .

Fixed cost CFC ) cost that does not of output and that can
level
-

vary with the

-

be eliminated only by shutting down or exit the market .

variable cost CVC) =

cost that varies with the level of output
cost ( MC )
Marginal Increase cost from the production of
=
in
resulting one

additional unit

④ How are
increasing returns to seal and scale economies related
to each other ?

Increasing returns to scale is

referring to the status when input gets
doubled or increased , that output increases
by a greater amount .

Economies of scale refer to larger scale production and fewer input costs .

In other words :
Output per unit of input increases as the scale of production rises
,

hence returns scale cost decline

increasing to .
when
average as output increases ,

it becomes to produce the unit the scale of

means that it cheaper average as

production rises hence of scale

,
resulting in economies .

④ What is the difference between the short -

run
average cost curve
and the long run cost curve ? Explain
average
-

cost min
y tangent points
- =
.

€
long run costs are accumulated when firms change production levels
#
-

over time in response to expected economic profits or losses .

In the MC
ATC (
short
)
going?In ,
- run

long run there are fixed factors of production

no
-

Short -
run costs are accumulated in real time throughout the • •

production process impact .

Fixed costs have no of short run
••

Costs , only variable costs and revenue affect the short -

run

production Variable costs change with the output

. ,
y
The main difference between
long run and short run . -
costs

is that there are no fixed factors long run In the long run
in the -
.
-

the
general price
level contractual expectations adjust fully to the state of the
,
wages , and
economy .

In the short run these variables-

do not always adjust due to the condensed time

period .