Draw a typical firm’s (short-run) marginal cost, average total cost, average variable cost and marginal revenue curves. Explain why the curves have these shapes. Explain the relationship between marginal cost and average total cost curves. Draw the marginal cost, average variable cost and marginal revenue curves for a firm that will shut down in the short-run. Draw the marginal cost, average variable cost and marginal revenue curves for a firm that will stay in business in the short-run. If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, what will be the shape of the corresponding marginal-cost curve? In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience a. Economies of scale b. Constant returns to scale c. Diseconomies of scale d. An increase in average total costs Suppose you have a job in production management. A portion of your costs are: Quantity 500 501 Average Total Cost 200 201

Your current level of production is 500 units. All 500 units have been ordered by your regular customers.


The phone rings. It’s a new customer who wants to buy one unit of your product, offering $450 for the unit. You would have to increase production to 501 unit. Should you do it? Compare marginal cost with marginal revenue. Total cost at 500 units is 200 × 500 = 100, 000. Total cost at 501 units is 201 × 501 = 100, 701. So marginal cost is 701. You should not do it, as 701 > 450. Sunk Costs A sunk cost is a cost that cannot be recovered, regardless of what one does. When a firm decides to shut down in short run, it ignores sunk costs. In this case, sunk costs are the fixed costs. The firm cannot recover them whatever it does. Thus it ignores these costs when deciding how much to produce. Why do restaurants stay open for lunch even if business is slow at lunchtime? The firm has already committed to pay the fixed...