PRODUCTION AND COSTS
Q) What is the basic process of production?
Answer: Transforming inputs (labor, land, capital) into outputs (goods, services).
Q) What function describes the relationship between inputs and outputs in a firm?
Answer: Production function.
Q) In the short run, what type of input can be varied by the firm?
Answer: Variable input (usually labor).
Q) What are the two main cost categories for a firm?
Answer: Fixed cost (unchanging) and variable cost (changes with output).
Q) What does the average cost of production measure?
Answer: Total cost per unit of output.
Q) What is the difference between average cost and marginal cost?
Answer: Average cost considers total output, while marginal cost focuses on the cost of producing one additional unit.
Q) What happens to the long-run average cost (LRAC) curve in the initial production phase?
Answer: It typically falls due to increasing returns to scale (IRS).
Q) What does the minimum point of the LRAC curve signify?
Answer: The output level at which the average cost of production is minimized.
Q) When does the LRAC curve start rising?
Answer: Usually when diminishing returns to scale (DRS) come into play.
Q) What is the relationship between LRMC and LRAC?
Answer: LRMC curve cuts the LRAC curve from below at the minimum point of LRAC.
Q) What happens to marginal cost when average cost is falling?
Answer: Marginal cost is less than the average cost.
Q) What can be inferred when marginal cost is greater than the average cost?
Answer: Average cost is rising.
Q) What determines the output level at which a firm should operate in the long run?
Answer: The point where LRAC is minimized.
Q) Why might a firm choose to operate in the short run at an output level where average cost is not minimized?
Answer: Short-run constraints like fixed costs or limited access to capital.
Q) What is the main takeaway about production costs in the long run?
Answer: LRAC can fall, remain constant, or rise depending on the returns to scale, with the minimum point often indicating the most efficient production level.
