Test: Cost and Revenue Concepts - 2 - JAMB MCQ

The short-run in economics refers to a period of time during which some inputs are fixed and cannot be varied. While certain inputs can be adjusted in the short-run, there is at least one input that remains constant. This fixed input is usually considered a fixed cost, such as capital or machinery.

Average variable cost (AVC) is calculated by dividing the total variable cost by the quantity of output. In this case, the total variable cost for 100 units is $1,000, so the average variable cost per unit is $1,000/100 = $10.00. Similarly, for 200 units, the total variable cost is $2,500, so the average variable cost per unit is $2,500/200 = $12.50. Thus, the average variable cost per unit is $7.50.

The average variable cost (AVC) curve is U-shaped in the short run. Initially, as the quantity of output increases, the average variable cost decreases due to the spreading of fixed costs over more units. However, as output continues to increase, the law of diminishing returns sets in, and the average variable cost starts to rise. This gives the AVC curve its characteristic U-shape.

The long-run average cost (LRAC) curve is typically U-shaped. In the long run, a firm has the flexibility to adjust all of its inputs and can choose the optimal combination of inputs that minimizes its average cost. Initially, as the firm increases its output, it benefits from economies of scale, leading to a downward-sloping portion of the LRAC curve. However, after a certain level of output, diseconomies of scale may set in, causing the LRAC curve to slope upward. This results in the U-shape of the LRAC curve.

Diseconomies of scale occur when a firm's long-run average costs increase as output increases. As a firm expands its production beyond a certain level, it may encounter various inefficiencies and coordination challenges. These can lead to an increase in costs per unit of output, resulting in diseconomies of scale. It is important for firms to manage their operations effectively to avoid or mitigate the negative effects of diseconomies of scale.

Marginal cost (MC) represents the additional cost incurred when producing one more unit of output. It is calculated by taking the change in total cost divided by the change in quantity of output. Marginal cost helps firms make decisions about production levels and pricing, as it indicates the cost implications of increasing or decreasing output.

When a firm's marginal cost is greater than its average variable cost, it suggests that the average variable cost is increasing as output increases. This indicates that the firm is experiencing diseconomies of scale. Diseconomies of scale occur when the firm's production costs increase at a faster rate than the increase in output. It could be a result of inefficiencies or difficulties in managing larger-scale production.

The supply curve of a firm is typically upward sloping. The upward slope of the supply curve reflects the positive relationship between price and quantity supplied by the firm. As the price of a good or service increases, the firm has an incentive to supply more of it, leading to an upward movement along the supply curve.

A decrease in the variable cost of production reduces the firm's cost of producing each unit of output. As a result, the firm becomes more willing and able to supply a greater quantity at each price level. This causes the firm's supply curve to shift to the right, indicating an increase in the quantity supplied at each price.

The point of intersection between the firm's marginal cost (MC) curve and the supply curve determines the level of output produced by the firm. At this point, the marginal cost of producing an additional unit of output is equal to the price at which the firm is willing to supply that unit. Therefore, the firm will produce and offer for sale the quantity of output corresponding to the intersection point.