Session:7 Production, Costs, and Industry Structure
Critical Thinking Questions
Principles of Microeconomics 3e | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-microeconomics-3e
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.
7 • Review Questions 185
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
cost curve is increasing. Why do you think that average and marginal cost curves have the same general
shape?
34. What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do
you suppose that is? Is this relationship the same in the long run as in the short run?
35. It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
36. Return to Table 7.12. In the top half of the table, at what point does diminishing marginal productivity kick
in? What about in the bottom half of the table? How do you explain this?
37. How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect
the long-run average cost curve of a firm? Can you draw the old curve and the new one on the same axes?
How might such an improvement affect other firms in the industry?
38. Do you think that the taxicab industry in large cities would be subject to significant economies of scale?
Why or why not?
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.
7 • Review Questions 185
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
cost curve is increasing. Why do you think that average and marginal cost curves have the same general
shape?
34. What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do
you suppose that is? Is this relationship the same in the long run as in the short run?
35. It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
36. Return to Table 7.12. In the top half of the table, at what point does diminishing marginal productivity kick
in? What about in the bottom half of the table? How do you explain this?
37. How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect
the long-run average cost curve of a firm? Can you draw the old curve and the new one on the same axes?
How might such an improvement affect other firms in the industry?
38. Do you think that the taxicab industry in large cities would be subject to significant economies of scale?
Why or why not?