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Answers To Exam Review Questions Module 4

The document summarizes answers to exam review questions about economics concepts. It discusses the law of diminishing returns, how marginal product and marginal cost relate, and what economies of scale are and four reasons firms may experience them.

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21 views2 pages

Answers To Exam Review Questions Module 4

The document summarizes answers to exam review questions about economics concepts. It discusses the law of diminishing returns, how marginal product and marginal cost relate, and what economies of scale are and four reasons firms may experience them.

Uploaded by

joehe2625
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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11175 Introduction to Economics

Answers to exam review questions module 4


Compare your responses to those provided below.

Question 1
What is the law of diminishing returns? Does it apply in the long run?

The law of diminishing returns is the principle that, at some point, adding more of a variable
input (for example, labour) to the same amount of a fixed input (such as capital) will cause
the marginal product of the variable input to decline. It doesn’t apply in the long run because
in the long run none of the inputs are fixed; all can vary.

Question 2
If the marginal product of labour is rising, is the marginal cost of production rising or falling? Briefly
explain.

If the marginal product of labour is rising, it means that each additional worker is
contributing more additional output than the previous worker. As a result, the additional, or
marginal, cost of output must be falling because the additional output takes fewer additional
workers to produce. Marginal product and marginal cost are mirror images of each other:
When marginal product increases, marginal cost falls, and vice versa.

Question 3
What are economies of scale? What are four reasons firms may experience economies of scale?

Economies of scale exist when a firm’s long-run average costs fall as the firm increases
output. Firms may experience economies of scale because: (1) a firm’s technology may allow
it to increase production with a smaller proportional increase in at least one input; (2) both
workers and managers can become more specialised as output expands; (3) large firms may
be able to purchase inputs at lower costs than smaller firms can; and (4) as a firm expands,
it may be able to borrow money at a lower interest rate, thereby lowering its costs.

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