Page 607 - Krugmans Economics for AP Text Book_Neat

Module 56 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. The accompanying table shows three possible combinations of b. Suppose that the firm, which has historically produced
fixed cost and average variable cost. Average variable cost is 12,000 units, experiences a sharp, permanent increase in
constant in this example. (It does not vary with the quantity of demand that leads it to produce 22,000 units. Explain
output produced.) how its average total cost will change in the short run
Choice Fixed cost Average variable cost and in the long run.
1 $8,000 $1.00 c. Explain what the firm should do instead if it believes
2 12,000 0.75 the change in demand is temporary. Section 10 Behind the Supply Curve: Profit, Production, and Costs
3 24,000 0.25
2. In each of the following cases, explain whether the firm
a. For each of the three choices, calculate the average total cost
is likely to experience economies of scale or diseconomies
of producing 12,000, 22,000, and 30,000 units. For each of
of scale and why.
these quantities, which choice results in the lowest average
a. an interior design firm in which design projects are
total cost?
based on the expertise of the firm’s owner
b. a diamond-mining company
Tackle the Test: Multiple-Choice Questions
1. In the long run, 4. When making decisions, which of the following costs
a. all inputs are variable. should be ignored?
b. all inputs are fixed. a. average costs
c. some inputs are variable and others are fixed. b. total costs
d. a firm will go out of business. c. marginal costs
e. firms increase in size. d. sunk costs
e. None—no costs should be ignored.
2. Which of the following is always considered the long run?
a. 1 month 5. Economies of scale will allow which of the following types of
b. 1 year cities to lower their average total cost of clearing snow by
c. 5 years investing in larger snow plow fleets? Cities with
d. 10 years a. more people.
e. none of the above b. more existing snow plows.
c. less snowfall.
3. Which of the following statements is generally correct?
d. larger budgets.
I. The long-run average total cost curve is U-shaped.
e. more snowfall.
II. The short-run average total cost curve is U-shaped.
III. Firms tend to experience economies of scale at low levels
of production and diseconomies of scale at high levels of
production.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III

module 56 Long-Run Costs and Economies of Scale 565