8.1 Prepare - Cost and Industry Structure_ ECON 161-01P Microeconomics

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Jun 14, 2024

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8.1 Prepare - Cost and Industry Structure Due Jun 15 at 11:59pm Points 12 Questions 8 Time Limit None Instructions (Devote about 2 hrs.) Instructions Prepare for the week by reading the following. Then answer and submit your answers to the questions that follow. Principles of Microeconomics Chapter 7: Cost and Industry Structure (https://openstax.org/books/principles-microeconomics- 2e/pages/7-introduction-to-production-costs-and-industry-structure) The Key Terms (https://openstax.org/books/principles-microeconomics-2e/pages/7-key-terms) and Key Concepts and Summary (https://openstax.org/books/principles-microeconomics-2e/pages/7-key-concepts-and-summary) sections Cost of Production – Microeconomics 3.3 (Part 1) (https://www.youtube.com/watch?v=ucJBO9UTmwo) (5:17) Cost Curves – Microeconomics 3.3 (Part 2) (https://www.youtube.com/watch?v=qYKJdooEnwU) (3:13) Marginal Cost and Average Total Cost – Micro 3.4 (https://www.youtube.com/watch?v=C3m9FC3T3vw) (3:16) Submission Notes If you need to draw or diagram anything for this assignment, please take a picture or screenshot of your drawing and insert it into your quiz submission. Make sure it is easy for the teacher to see and grade. Remember that you are free to ask the teacher and your classmates about any questions you are struggling with after you have reviewed the week’s materials and have submitted your best-effort first attempt. Grading 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 1/7

Attempt History Attempt Time Score LATEST Attempt 1 27 minutes 0.75 out of 12 * * Some questions not yet graded Score for this quiz: 0.75 out of 12 * * Some questions not yet graded Submitted Jun 10 at 9:45pm This attempt took 27 minutes.  Question 1 Not yet graded / 2 pts Your Answer: You will receive points for every correctly answered question. Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run? When production increases, fixed costs will be allocated to a higher output volume. Variable cost per unit and fixed cost per unit will decline, and thus, the production efficiency will increase. This shows economies of scale. But whenever the output goes beyond a particular limit, the average costs will rise. It may lead to diseconomies of scale. When demand is reduced, and the actual output can't be sold due to various issues, the firm may not survive in the long run. The demand reduction may be due to demand for foreign automobiles, an increase in fuel price, or a lack of quality or efficiency. According to the question, there are four domestic auto manufacturers. As the demand for domestic autos is not greater than 2.5 times the quantity produced at the bottom of the long-run average cost curve, any of the four firms will not exist in the long run. Also, at least 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 2/7

 Question 2 Not yet graded / 1 pts Your Answer:  Question 3 Not yet graded / 2 pts Your Answer:  Question 4 Not yet graded / 1 pts Your Answer: any one of the four firms will be striving to face such a difficult situation. Would you consider an interest payment on a loan to a firm an explicit or implicit cost? An interest payment on a loan to a firm would be considered an explicit cost because it involves a direct outlay of money by the firm to pay for the interest expense. Explicit costs are the actual monetary expenses incurred by a firm in the production process. They are expenses easily identified and recorded in the firm's accounting records, such as wages, rent, and materials costs. On the other hand, implicit costs are non-monetary costs not recorded in the accounting records but still represent an opportunity cost to the firm, such as the opportunity cost of using the owner's capital or the opportunity cost of foregone alternative uses of resources. Since an interest payment is a monetary expense the firm must pay out to borrow funds, it is considered an explicit cost. What is a production function? In economics, a production function relates to the physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum output obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs. In choosing a production technology, how will firms react if one input becomes relatively more expensive? 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 3/7

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 Question 5 Not yet graded / 2 pts Your Answer:  Question 6 Not yet graded / 2 pts Your Answer: Factors of production are land, labor, capital, technology, and entrepreneurship. Marginal cost is the additional cost of producing one more unit of good. Total cost is the sum of fixed and variable costs. The average cost is the cost divided by the total production of goods. Several methods exist, and inputs can be combined to make output. Production technology is the process or the method used to combine inputs to produce an output. Now if one input becomes relatively expensive then the firm will opt a production technology which will use less of that input in production of the output to maintain the lowest possible production cost. What is the difference between economies of scale, constant returns to scale, and diseconomies of scale? Economies of scale: Increasing production scale decreases average cost per unit. Constant returns to scale: Increasing production scale leads to continuous average cost per unit. Diseconomies of scale: Increasing production scale increases average cost per unit. What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run? Marginal Product MP The MP curve illustrates the additional output produced by using one more unit of a variable input (like labor) while keeping other inputs constant. Initially, as more units of a variable input are employed, the MP can increase due to increased specialization and efficiencies. However, after reaching a certain point, the MP starts to decline because of the law of diminishing returns; each additional unit of input contributes less to total output than the previous unit. Marginal Cost MC The MC curve shows the additional cost of producing one more output unit. It is derived from the changes in total cost when output is increased by one unit. When the MP is rising, the additional units of output are being produced more efficiently, and the MC 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 4/7

 Question 7 0.25 / 1 pts You Answered average profit total cost divided by the quan profit divided by the quantity of output produced; also known as profit margin You Answered average total cost the sum of fixed and variable total cost divided by the quantity of output You Answered diseconomies of scale the sum of fixed and variable of each additional unit falls. Conversely, when the MP declines, each additional output unit requires proportionally more input, driving up the MC. The relationship between MP and MC directly reflects the law of diminishing returns in the short run, with MP dictating the behavior of MC. In the long run, the relationship is more complex due to the ability to adjust all inputs and economies or diseconomies of scale. Match the following terms to their definitions from the text. 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 5/7

the long-run average cost of producing output increases as total output increases Correct! fixed cost cost of the fixed inputs; expen Other Incorrect Match Options: change in a firm’s output when it employees more labor; mathematically, MP=ΔTP/ΔL the sum of fixed and variable costs of production factors of production that a firm can easily increase or decrease in a short period of time  Question 8 0.5 / 1 pts Correct! total cost the sum of fixed and variable You Answered variable cost the sum of fixed and variable cost of production that increases with the quantity produced; the cost of the variable inputs You Answered Match the following terms to their definitions from the text. 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 6/7

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variable inputs an organization that combine factors of production that a firm can easily increase or decrease in a short period of time Correct! revenue income from selling a firm’s p Other Incorrect Match Options: the long-run average cost of producing output decreases as total output increases total revenues minus explicit costs, including depreciation an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs. Quiz Score: 0.75 out of 12 * Some questions not yet graded 6/12/24, 9:51 PM 8.1 Prepare - Cost and Industry Structure: ECON 161-01P Microeconomics https://ensign.instructure.com/courses/20024/quizzes/278845?module_item_id=2503683 7/7

8.1 Prepare - Cost and Industry Structure_ ECON 161-01P Microeconomics

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