228801246-Noman(诺曼)

Chapter 13 The Costs of Production

1) Define total cost, average total cost, and marginal cost. How are they

related?

1. Total Cost (TC): Total cost refers to the sum of all the costs incurred by a
firm in the production of a specific quantity of output. It includes both fixed
costs (costs that do not vary with the level of production) and variable costs
(costs that change with the level of production).
2. Average Total Cost (ATC): Average total cost is calculated by dividing the
total cost by the quantity of output produced. Mathematically, ATC = TC/Q,
where TC is total cost and Q is the quantity of output. It represents the average
cost per unit of output. ATC=TC/Q
3. Marginal Cost (MC): Marginal cost is the additional cost incurred by
producing one more unit of output. It is the change in total cost resulting from
a one-unit change in quantity. MC=ΔTC/ΔQ

Now, let's discuss their relationships:

Total Cost and Average Total Cost: Total cost is the overall cost incurred in
production, while average total cost is the cost per unit of output. The relationship is
that the average total cost is the total cost divided by the quantity of output (ATC =
TC/Q).

Marginal Cost and Average Total Cost: Marginal cost is related to average total
cost in that, at the minimum point of the average total cost curve, marginal cost equals
average total cost. When marginal cost is below average total cost, it tends to pull the
average down, and when it's above, it tends to push it up.
MC=ATC at the minimum point of ATC
Understanding these relationships is essential for firms to make production decisions
and optimize their costs.

2) Define economies of scale and explain why they might arise. Define

diseconomies of scale and explain why they might arise.

Economies of Scale: Economies of scale refer to the cost advantages that a business
can achieve as a result of an increase in the scale of production. In other words, as the
level of production increases, the average cost of producing each unit decreases.
There are various factors that contribute to economies of scale:
1. Specialization: Larger-scale production often allows for a more specialized
 228801246-Noman(诺曼)

division of labor. Workers can focus on specific tasks, leading to increased

efficiency.
2. Bulk Purchasing: Larger quantities of inputs can be purchased at lower unit
costs. This is often seen in industries where raw materials or components are
bought in bulk.
3. Technological Advances: Large-scale production can justify investments in
advanced technologies and machinery that improve efficiency and reduce per-
unit production costs.
4. Marketing and Distribution: The cost of marketing and distribution per unit
can decrease with larger-scale operations, especially if the product is
standardized and can be distributed widely.
5. Utilization of Resources: With increased production, resources such as
facilities and equipment are better utilized, reducing the per-unit cost.
Diseconomies of Scale: Diseconomies of scale occur when the cost per unit of
production increases as the scale of production increases. This can be counterintuitive,
as one might expect that production efficiency would continue to improve with scale.
Several factors contribute to diseconomies of scale:
1. Coordination and Communication Issues: As a company grows,
coordination and communication become more challenging. Bureaucracy may
increase, leading to inefficiencies and higher costs.
2. Managerial Issues: Larger organizations may face difficulties in managing
and coordinating activities. Decision-making can become slower, and there
may be a loss of control over different parts of the organization.
3. Complexity: Managing a complex organization can lead to increased costs.
As the number of products, services, and markets expands, the complexity of
operations can lead to diseconomies.
4. Resistance to Change: Larger organizations may be resistant to change,
hindering adaptability. This resistance can result in inefficiencies and
increased costs.
 228801246-Noman(诺曼)

Chapter 14 Firms in Competitive Markets

1) Draw the cost curves for a typical firm. For a given price, explain

how the firm chooses the level of output that maximizes profit.
 228801246-Noman(诺曼)

2) Does a firm’s price equal marginal cost in the short run, in the long

run, or both? Explain.

Firm's Price and Marginal Cost:
 In the short run, a firm's price may not necessarily equal its marginal cost. In
the short run, a firm may operate under conditions of fixed inputs, and its price
is influenced by both marginal cost and average variable cost. If the price is
above average variable cost, the firm may choose to produce, even if the price
is below average total cost, as long as it covers variable costs and contributes
to fixed costs.

 In the long run, however, economic theory often assumes that firms in a
competitive market will adjust their production levels such that price equals
marginal cost. In the long run, firms can enter or exit the market, and they will
adjust their production levels to maximize profit. If a firm is earning above-
normal profits, new firms may enter the market, increasing competition and
bringing prices down to the level of marginal cost.

3) Are market supply curves typically more elastic in the short run or

in the long run? Explain.

Market Supply Curve Elasticity:
 Market supply curves are typically more elastic in the long run than in the
short run. In the short run, firms may be constrained by fixed factors such
as plant capacity and the availability of specialized resources. As a result,
they may not be able to quickly adjust their production levels in response to
changes in price.
 In the long run, firms can adjust their production levels by changing the
quantity of all inputs, including plant size and capacity. This increased
flexibility allows for a more elastic response to changes in price. If prices
rise, existing firms can expand production, and new firms can enter the
market. Conversely, if prices fall, firms can reduce production or exit the
market.
 228801246-Noman(诺曼)

Chapter 15 Monopoly
1) Draw the demand, marginal-revenue, and marginal-cost curves for a monopolist.
Show the profit-maximizing level of output. Show the profit-maximizing price. Show
the level of output that maximizes total surplus. Show the deadweight loss from the
monopoly. Explain your answer.

2) Why is a monopolist’s marginal revenue less than the price of its good?

Can marginal revenue ever be negative? Explain.

A monopolist's marginal revenue is less than the price of its good because a
monopolist faces a downward-sloping demand curve for its product. In a monopoly,
the monopolist is the sole seller of a particular product and has control over the
quantity supplied to the market. Unlike in a perfectly competitive market, where a
firm is a price taker and faces a horizontal demand curve, a monopolist faces a
 228801246-Noman(诺曼)

negatively sloped demand curve.

Here's why a monopolist's marginal revenue is less than the price of its good:
1. Price Effect:
 In a monopoly, to sell an additional unit of output, the monopolist must
lower the price for all units sold. This is because the demand curve
slopes downward. As a result, the marginal revenue earned from
selling an additional unit is less than the price at which all units are
sold.
2. Marginal Revenue Calculation:
 Marginal revenue (MR) is the additional revenue generated by selling
one more unit of the good. For a monopolist facing a downward-
sloping demand curve, to sell more units, the monopolist must reduce
the price for all units sold.
 Therefore, the marginal revenue at each level of output is not equal to
the price but is less than the price. Mathematically, if P represents the
price, MR < P.