Production and Cost Test Bank
Chapter 05
Production and Cost
Essay Questions 1. Always Round Tire has a production function of Q = 300 L.75 K.5. In the short run, if L = 250 and K = 25, what happens to the output of tires if L jumps to 300 and then 350. What law does this illustrate?
When L=250 and K=25 then Q=94307. When L increases to 300, Q increases to 108,127. When L increases to 350, Q increases to 121,379. This shows the effects of diminishing marginal returns to labor as a factor of production.
AASCB: Analytic
Bloom's: Application 2. Always Round Tire has a production function of Q = 300 L.75 K.5 . If Always Round Tire doubles the size of its production facility – increasing L from 250 to 500 and K from 25 to 50 – what happens to the cost of production, even though we do not know the wages of labor or the price of capital?
This production exhibits increasing returns to scale. Doubling the scale of production will more than double the quantity of output. Costs per unit will decline because the firm takes advantage of the economies of scale.
AASCB: Communication
Bloom's: Comprehension
3. Why do economies of scale and learning curve effects look similar when they are graphed? What different concepts do they represent?
A graph of economies of scale shows that average costs per unit of output fall when the quantity of output increases. However, this decrease in the average cost per unit of output occurs at a decreasing rate. Economies of scale show the cost advantages larger firms have in some industries, like basic metals, where costs per unit fall with the cumulative volume of output. A graph of a learning curve shows that average costs per unit of output fall when the cumulative quantity of output produced since inception increases. This decrease in the average cost per unit of output occurs at a decreasing rate. Learning curves show the cost advantages firms that have cumulatively produced greater amounts of output have in some industries,
Production and Cost
Essay Questions 1. Always Round Tire has a production function of Q = 300 L.75 K.5. In the short run, if L = 250 and K = 25, what happens to the output of tires if L jumps to 300 and then 350. What law does this illustrate?
When L=250 and K=25 then Q=94307. When L increases to 300, Q increases to 108,127. When L increases to 350, Q increases to 121,379. This shows the effects of diminishing marginal returns to labor as a factor of production.
AASCB: Analytic
Bloom's: Application 2. Always Round Tire has a production function of Q = 300 L.75 K.5 . If Always Round Tire doubles the size of its production facility – increasing L from 250 to 500 and K from 25 to 50 – what happens to the cost of production, even though we do not know the wages of labor or the price of capital?
This production exhibits increasing returns to scale. Doubling the scale of production will more than double the quantity of output. Costs per unit will decline because the firm takes advantage of the economies of scale.
AASCB: Communication
Bloom's: Comprehension
3. Why do economies of scale and learning curve effects look similar when they are graphed? What different concepts do they represent?
A graph of economies of scale shows that average costs per unit of output fall when the quantity of output increases. However, this decrease in the average cost per unit of output occurs at a decreasing rate. Economies of scale show the cost advantages larger firms have in some industries, like basic metals, where costs per unit fall with the cumulative volume of output. A graph of a learning curve shows that average costs per unit of output fall when the cumulative quantity of output produced since inception increases. This decrease in the average cost per unit of output occurs at a decreasing rate. Learning curves show the cost advantages firms that have cumulatively produced greater amounts of output have in some industries,