Production Basics
What is the law of diminishing marginal returns?
As variable inputs are added to fixed resources, the additional output will eventually decrease.
What is the formula for marginal cost?
Change in total cost divided by change in quantity: MC = ΔTC / ΔQ.
What distinguishes the short run from the long run in production?
In the short run, at least one input is fixed; in the long run, all inputs are variable.
Name one characteristic of a perfectly competitive market.
Many buyers and sellers, identical products, or free entry and exit.
On a cost curve graph, where does MC intersect ATC and AVC?
At their minimum points.
At what point does marginal product begin to decline?
When the law of diminishing marginal returns takes effect—after the point of increasing marginal returns.
Which cost curves are U-shaped and why?
ATC and AVC are U-shaped due to the law of diminishing marginal returns.
Define economies of scale.
A situation where long-run average total cost decreases as output increases.
In perfect competition, why are firms price takers?
Because each firm’s output is too small to influence market price.
What does it mean when price is below AVC on a graph?
The firm should shut down immediately in the short run.
If marginal product is negative, what does that imply about total product?
Total product is decreasing.
Why does the gap between ATC and AVC shrink as output increases?
Because AFC decreases as output increases, narrowing the difference.
What happens to long-run average cost in diseconomies of scale?
LRATC increases as output increases.
What condition must be met for profit maximization in perfect competition?
Marginal revenue equals marginal cost (MR = MC).
How do you find profit on a graph of a perfectly competitive firm?
(P - ATC) × Quantity.
True or False: A firm can operate efficiently with zero fixed inputs.
False. In the short run, at least one input must be fixed.
At what output level does marginal cost intersect ATC and AVC?
At their minimum points.
Name one cause of diseconomies of scale.
Coordination or communication issues in large firms.
If P > ATC at the profit-maximizing output, what is the firm earning?
Economic profit.
Identify the shutdown point on a cost graph.
Where price equals AVC at its minimum.
Assume a firm hires a 6th worker and output decreases. What does this indicate about marginal product and total product?
Marginal product is negative, and total product is declining.
A firm’s total cost increases from $1,000 to $1,150 when output rises from 20 to 25 units. What is the marginal cost?
MC = ($1,150 - $1,000) / (25 - 20) = $150 / 5 = $30.
If a firm experiences constant returns to scale, what is happening to its long-run average total cost?
LRATC remains unchanged as output increases.
In the long run, what happens to economic profit in a perfectly competitive market?
It becomes zero due to entry of new firms.
Draw and label a graph showing a firm in perfect competition earning a loss. Indicate P, MR, MC, ATC, AVC.
(Teacher evaluates drawing; ensure P < ATC but P > AVC)