Review Questions

domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run?

Review Questions

9 . What are explicit and implicit costs? 10 . Would you consider an interest payment on a loan to a firm an explicit or implicit cost? 11 . What is the difference between accounting and economic profit? 12 . What is a production function? 13 . What is the difference between a fixed input and a variable input? 14 . How do we calculate marginal product? 15 . What shapes would you generally expect a total product curve and a marginal product curve to have? 16 . What are the factor payments for land, labor, and capital? 17 . What is the difference between fixed costs and variable costs? 18 . How do we calculate each of the following: marginal cost, average total cost, and average variable cost? 19 . What shapes would you generally expect each of the following cost curves to have: fixed costs, variable costs, marginal costs, average total costs, and average variable costs? 20 . Are there fixed costs in the long-run? Explain briefly. 21 . Are fixed costs also sunk costs? Explain. 22 . What are diminishing marginal returns as they relate to costs? 23 . Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost? 24 . What is a production technology? 25 . In choosing a production technology, how will firms react if one input becomes relatively more expensive? 26 . What is a long-run average cost curve? 27 . What is the difference between economies of scale, constant returns to scale, and diseconomies of scale? 28 . What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale? 29 . Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?

Critical Thinking Questions

30 . Small “Mom and Pop firms,” like inner city grocery stores, sometimes exist even though they do not earn economic profits. How can you explain this? 31 . A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Suppose fixed cost is $1,000. What does the average fixed cost curve look like? Use your response to explain what “spreading the overhead” means. 32 . How does fixed cost affect marginal cost? Why is this relationship important? 33 . Average cost curves (except for average fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal