NSS Exploring Economics 2 (3rd Edition)

Answers to Exercises

Chapter 11 Production in the short run and long run

Questions
p.107
Misconceptions 11.1
Are the following statements correct?
a. As the salaries of employees at a company are increased every year, they are variable
costs of a company.
b. Monthly wages of workers are variable costs since the monthly wages vary from worker
to worker.

p.111
Test yourself 11.1
a. In the table below, which is a variable factor and which is a fixed factor?
b. Is the firm producing in the short run or long run? Why?
c. Fill in the missing figures for total product, average product and marginal product.
Labour Capital Total product Average product Marginal product
(units) (units) (units) (units) (units)
3 1 10
3 2 22
3 3 12
3 4 13
3 5 12
3 6 8

Test yourself 11.2

‘When marginal product (MP) is positive, total product increases.’ Do you agree? Explain.

NSS Exploring Economics 2 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
p.113
Test yourself 11.3
Is David’s situation in ‘Task 11.2’ consistent with the law of diminishing marginal returns?
Number of
Hours spent Total marks Extra marks
books used
3 2 60 ─
4 2 64 4
5 2 70 6
6 2 74 4
7 2 74 0

p.115
Test yourself 11.4
The following table shows the input-output relationship of Firm A.
Machines Number of Average working hours Total output
(units) workers of workers per day (units)
1 3 6 100
2 3 7 110
3 3 8 130
4 3 9 145
Does the law of diminishing marginal returns apply to the firm? Explain.

p.119
Test yourself 11.5
Explain whether the firm below is in the short run or long run.
Outputs (units) 0 1 2 3
Total cost ($) 0 7 9 11

p.120
Misconceptions 11.2
Are the following statements correct?
a. In the short run, when a firm produces zero output, its TFC is equal to zero.
b. In the long run, total cost is equal to the sum of marginal costs.
c. When output increases, the total cost must increase and so must the average cost.

NSS Exploring Economics 2 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
p.122
Test yourself 11.6
‘Diseconomies of scale can be explained by the law of diminishing marginal returns.’ Do you
agree? Explain your answer.

p.128
Test yourself 11.7
Explain TWO external diseconomies of scale that may arise when more and more Korean
restaurants open on ‘Korean Street’.

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Answers to Exercises (Chapter 11)
Exercises
pp.131-133
Multiple Choice Questions

Choose the best answer.

1.
Which of the following statements about fixed factors and variable factors is INCORRECT?
A. Machines and equipment must be fixed factors and labour must be variable factors.
B. The employment of variable factors varies with output.
C. The employment of variable factors drops to zero at zero output.
D. The employment of fixed factors remains unchanged even at zero output.

2.
Which of the following statements about production runs is INCORRECT?
(1) In the short run, all factors are fixed.
(2) In the long run, all factors become variable.
(3) A firm increases the employment of variable factors in order to raise output in both the
short run and long run.
(4) A period within one year is short run while a period longer than one year is long run.
A. (3) only
B. (1) and (4) only
C. (1), (2) and (4) only
D. (1), (3) and (4) only

3.
June opens a boutique in Mong Kok. The following items are found at the boutique.
(1) Fitting rooms
(2) Salespeople
(3) Customers
(4) Uniforms provided by the boutique
(5) Garments
In the long run, which of the above items are variable factors of production at the boutique?
A. (1) and (2) only
B. (2), (4) and (5) only
C. (1), (2), (4) and (5) only
D. (1), (2), (3), (4) and (5)

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Answers to Exercises (Chapter 11)
4.
Refer to the table below.
Labour Machines Average output
(units) (units) of labour (units)
1 3 2
2 3 5
3 3 8
4 3 9
5 3 8
Diminishing marginal returns set in after ____ units of labour are employed in production.
A. 2
B. 3
C. 4
D. 5

5.
The following table shows the monthly production of a firm with two inputs, machines and
labour.
Machines Labour Total product
(units) (units) (units)
2 10 10
2 11 24
2 12 42
2 13 62
2 14 X
If the law of diminishing marginal returns applies to the firm,
A. X is equal to 80.
B. X can be greater than 80.
C. X must be smaller than 82.
D. X can be equal to 82.

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Answers to Exercises (Chapter 11)
6.
The table below shows the input-output relationship of a firm.
Capital Labour Marginal output
(units) (units) (units)
5 10 25
6 10 15
7 10 5
8 10 -5
From the above table, which of the following statements about the firm is correct?
A. Total output increases at the beginning but decreases at the end.
B. The firm suffers from diseconomies of scale when more units of capital are employed.
C. The law of diminishing marginal returns does not apply to the firm.
D. The marginal cost of production is decreasing.

7.
The table below shows the total output of Firm A, which employs only two inputs in
production.
Capital Number of Average working hours Total output
(units) workers of workers per day (units)
1 5 8 2,000
1 5 9 2,200
1 5 10 2,300
1 5 11 2,350
As the market demand for Firm A’s product increases, the firm raises output by requiring
workers to work longer from eight hours per day to 11 hours per day.
Based on the above information,
A. the amount of labour employed by the firm remains constant.
B. the firm enjoys external economies of scale.
C. the change in total output can be explained by the law of diminishing marginal returns.
D. All of the above

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Answers to Exercises (Chapter 11)
8. *
The following table shows the output-cost relationship of a firm.
Outputs (units) 0 1 2 3 4
Total cost ($) 4 10 16 18 32
Based on the above table, we can conclude that
A. the firm is operating in the short run.
B. the law of diminishing marginal returns holds.
C. the average variable cost at the second unit of output is $8.
D. the optimal scale of the firm is 3 units of output.

9. *
Which of the following statements can account for internal diseconomies of scale?
A. When a firm expands, it has to borrow more money and pay a higher interest.
B. When the organisation of a firm becomes too bulky, decisions are delayed and
coordination is weakened.
C. When a firm operates beyond the optimal scale of production, it has to pay a higher
average cost.
D. When other firms in the industry expand and existing markets become saturated, existing
firms have to bear higher marketing costs.

10.
The following table shows the inputs, outputs and total costs of a firm. The only inputs
required for production are capital and labour.
Capital Labour Total output Total cost
(units) (units) (units) ($)
1 1 5 100
2 2 15 200
3 3 30 300
4 4 50 400
From the above data,
A. the average cost remains constant at $100.
B. the firm enjoys economies of scale.
C. the optimal scale of production is 50 units of output.
D. the law of diminishing marginal returns does not apply to the firm as the marginal output
increases.

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Answers to Exercises (Chapter 11)
p.134
Short Questions
1.
a. What are short run and long run? (2 marks)
b. What is the difference between them? (2 marks)

2.
Suppose the output of the tuck shop at your school is zero during the Lunar New Year
Holiday.
a. Suggest THREE variable factors at the tuck shop. What are their quantities employed
over the holiday? (4 marks)
b. Suggest TWO fixed costs the tuck shop bears. Why does the tuck shop not cut them to
zero? (4 marks)

3.
a. Chan’s logistics company finds that its long run average cost decreases when it opens
several new branches. Give TWO possible reasons why this happens. (4 mark)
b. Give TWO reasons why Chan’s logistics company may suffer external diseconomies of
scale when many other logistics firms are set up. (4 marks)

4.
In recent years, many entrepreneurs have moved their garment factories from southern
China to Vietnam because production costs are lower there. As a result, the
manufacturing industry in Vietnam has expanded rapidly. We have found that a large
amount of clothing and footwear is currently made in Vietnam.
From the above information, suggest TWO reasons why a garment factory in Vietnam may
enjoy external economies of scale. (4 marks)

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Answers to Exercises (Chapter 11)
pp.134-135
Structured Questions
1.
The following table shows the product items and cost items of a firm. Suppose the unit costs
of capital and labour are $10 and $20, respectively.
Total Average Marginal Total Total
Capital Labour Total Average
product product product fixed variable
(units) (units) cost ($) cost ($)
(units) (units) (units) cost ($) cost ($)
4 1 2
4 2 5
4 3 10
4 4 14
4 5 14
4 6 12
a. Find the average product, marginal product, total fixed cost, total variable cost, total cost
and average cost and fill in the table. (6 marks)
b. Is the firm operating in the short run or long run? Explain your answer. (2 marks)
c. Explain whether the law of diminishing marginal returns applies to the firm. (3 marks)

2.
A factory employs a total of 30 workers. Each worker has the same working hours. The
following table shows the fall in its total output when workers are absent from work in the
short run.
Number of workers Decrease in daily output
absent from work (units)
1 20
2 45
3 75
4 115
5 145
a. State the law of diminishing marginal returns. (3 marks)
*b. Is the law applicable to the factory? Explain your answer. (4 marks)

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Answers to Exercises (Chapter 11)
3.
The table below shows a firm’s production of Good X. Only two inputs are required in the
production process.
Capital Labour Total product Total cost
(units) (units) (units) ($)
1 1 10 100
2 2 25 200
3 3 41 300
4 4 50 400
a. i. Calculate the changes in total product. (2 marks)
ii. Explain whether the data illustrate the law of diminishing marginal returns. (2 marks)
b. i. Calculate the average cost of output at each level of total product. (2 marks)
ii. Based on the result in (b)(i), do the data illustrate any economic concept(s)?
(4 marks)

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Answers to Exercises (Chapter 11)
Answers
p.107
Misconceptions 11.1
a. Incorrect. If the increase in salaries is not due to an increase in output, we cannot
conclude that they are variable costs.
b. Incorrect. If the monthly wages do not vary with output, they are fixed costs.

p.111
Test yourself 11.1
a. In the table, capital is a variable factor and labour is a fixed factor. (Remarks: In this
question, labour does not vary when output changes, while capital increases with output.)
b. The firm is producing in the short run because it employs a fixed factor.
c.
Labour Capital Total product Average product Marginal product
(units) (units) (units) (units) (units)
3 1 10 10 ÷1 = 10 10 – 0 = 10
3 2 22 22 ÷2 = 11 22 – 10 = 12
3 3 12 × 3 = 36 12 36 – 22 = 14
3 4 13 × 4 = 52 13 52 – 36 = 16
3 5 52 + 12 = 64 64 ÷5 = 12.8 12
3 6 64 + 8 = 72 72 ÷6 = 12 8

Test yourself 11.2

Agree. TPn = TP(n – 1) + MPn = ∑MP. According to this formula, when MP is positive, total
product must increase.

p.113
Test yourself 11.3
Yes, because the marginal product decreases from 6 marks to 4 marks when David increases
his studying time from 5 hours to 6 hours.

p.115
Test yourself 11.4
No, because all factors are variable, i.e., the firm is operating in the long run.
Remarks: Although the number of workers remains unchanged, the employment of labour
(= Number of workers × Average working hours) increases when total output increases.
Hence, labour is a variable factor in this case.

NSS Exploring Economics 2 (3rd Edition) 11 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 11)
p.119
Test yourself 11.5
The firm is in the long run, because it does not employ any fixed factors and thus no fixed
costs are incurred at zero output.

p.120
Misconceptions 11.2
a. Incorrect. In the short run, a firm always employs the same amount of fixed factors, even
when producing zero output. Hence, its TFC is a positive constant even at zero output.
b. Correct. The sum of marginal costs is total variable cost. In the long run, TFC = 0. As a
result, TC = TVC = ∑MC.
c. Incorrect. To raise output, a firm has to employ more variable factors. Hence, total cost
normally increases. However, since average cost = total cost ÷ output, average cost may
not increase.
● If %  TC < %  Q, AC may fall.
● If %  TC = %  Q, AC may remain unchanged.

p.122
Test yourself 11.6
No. The law of diminishing marginal returns concerns the disadvantage from the excessive
addition of a variable factor to a given quantity of fixed factors in the short run.
However, diseconomies of scale are the disadvantages from an excessive expansion in
production scale (employment of all factors) in the long run.
Since there is no fixed factor in the long run, the law of diminishing marginal returns cannot
be used to explain diseconomies of scale.

p.128
Test yourself 11.7
As more and more Korean restaurants open on ‘Korean Street’, the huge demand for inputs
may raise input costs for these restaurants.
The existing market may approach saturation. These restaurants may need to pay higher
marketing costs to attract customers.

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Answers to Exercises (Chapter 11)
Exercises
pp.131-133
Multiple Choice Questions
1. A
In the short run, some firms may have to employ more machines and equipment to raise
their output, e.g., sewing machines in a factory and dishes in a restaurant. In these cases,
the machines and equipment belong to variable factors.
2. B
3. C
Customers are not a factor of production.
4. B
According to the table, MP drops after the 3rd unit of labour is employed.
Labour (units) AP TP MP
1 2 2 (= 2 × 1) 2 (= 2 – 0)
2 5 10 (= 5 × 2) 8 (= 10 – 2)
3 8 24 (= 8 × 3) 14 (= 24 – 10)
4 9 36 (= 9 × 4) 8 (= 36 – 24)
5 8 40 (= 8 × 5) 4 (= 40 – 36)

5. C
Machines Labour Total product
MP
(units) (units) (units)
2 10 10 –
2 11 24 14
2 12 42 18
2 13 62 20
2 14 X < 20
If the law of diminishing marginal returns applies to the firm, the MP of the 14th unit of
labour must be smaller than 20. Hence,
X – 62 < 20
X < 82
6. A
Negative MP implies that TP decreases.

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Answers to Exercises (Chapter 11)
7. C
MP drops when the employment of labour increases from 50 units to 55 units.
Number of Average working
Labour TP MP
workers hours of workers
5 8 40 (= 5 × 8) 2,000 ─
5 9 45 (= 5 × 9) 2,200 200 (= 2,200 – 2,000)
5 10 50 (= 5 × 10) 2,300 100 (= 2,300 –2,300)
5 11 55 (= 5 × 11) 2,350 50 (= 2,350 – 2,300)
8. A
Option A is correct. Since the total cost is $4 at zero output, the firm has fixed factors and
is operating in the short run.
Option B is incorrect. We cannot draw the conclusion, since we do not have information
about the marginal product.
Option C is incorrect. The average variable cost at the second unit of output is ($16 – $4)
÷2 = $6.
Option D is incorrect. The firm is operating in the short run. We cannot find the optimal
scale from the given data.
9. B
Option A is incorrect. To borrow more money, the total amount of interest paid is larger
but the interest rate and the LRAC may not increase.
Option C is incorrect. The statement describes the meaning of diseconomies of scale but
it does not account for that.
Option D is incorrect. It is a source of external diseconomies of scale, not internal.
10. B
Capital Labour Total output Total cost
AC
(units) (units) (units) ($)
1 1 5 100 20
2 2 15 200 13
3 3 30 300 10
4 4 50 400 8
Option B is correct. The firm enjoys economies of scale because the average cost
decreases when the production scale increases.
Option C is incorrect. As the average cost may continue to fall, the optimal scale of
production may be greater than 50 units of output.
Option D is incorrect. The law does not apply as the data shows the long run situation.

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Answers to Exercises (Chapter 11)
p.134
Short Questions
1.
a. Short run is the period over which some factors of production are variable and some are
fixed. (1 mark)
Long run is the period over which all factors of production are variable. (1 mark)
b. Their difference is that fixed factors exist in the short run but not in the long run.
(2 marks)

2.
a. Examples of variable factors:
water, electricity, food, drinks, snacks, part-time labour, etc.
(Any THREE of the above. 1 mark × 3 = 3 marks)
Their quantities employed are zero during the Lunar New Year Holiday. (1 mark)
b. Examples of fixed costs:
business registration fees, the shop’s rent, loan interest and monthly wages independent of
output, etc.
(Any TWO of the above. 1 mark × 2 = 2 marks)
This is because adjusting the employment of fixed factors with output is too costly. For
example, it is unwise to close the tuck shop and sell all the equipment before the holiday
and open the tuck shop and buy the equipment again after the holiday. (2 marks)

3.
a. Possible reasons for a decrease in average cost:
● Chan’s logistics company can spread its advertising costs over a larger output.
● Chan’s logistics company can get a larger discount when buying vehicles, equipment
and fuel in bulk.
● Chan’s logistics company can apply a wider scope of specialisation among managers
and attract better managers.
● Chan’s logistics company can utilise its fleet of vehicles more fully.
● Chan’s logistics company can bargain for a lower borrowing rate.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)
b. Possible reasons for suffering external diseconomies of scale:
● Higher cost of recruiting drivers and transport workers as the competition and demand
for experienced drivers and transport workers increase.
● Higher cost of marketing as the existing market becomes saturated.
● Higher cost of buying backup services as the demand for these services increases.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

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Answers to Exercises (Chapter 11)
4.
Possible reasons for enjoying external economies of scale:
● Lower cost of recruiting and training workers as more experienced workers are available
in the manufacturing industry.
● Lower cost of marketing and promotion as more people know about the expanding
manufacturing industry in Vietnam.
● Lower cost of buying backup services as more related businesses will be developed.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

p.134
Structured Questions
1.
a.
Total Average Marginal Total Total
Capital Labour Total Average
product product product fixed variable
(units) (units) cost ($) cost ($)
(units) (units) (units) cost ($) cost ($)
4 1 2 2 2 40 20 60 30
4 2 5 2.5 3 40 40 80 16
4 3 10 3.3 5 40 60 100 10
4 4 14 3.5 4 40 80 120 8.6
4 5 14 2.8 0 40 100 140 10
4 6 12 2 -2 40 120 160 13.3
(1 mark for each column; deduct 0.5 marks for each mistake; a maximum of 1 mark can be
deducted for each column.)
b. Short run, (1 mark)
because the firm employs a fixed factor, capital, of which the quantity employed is fixed
at 4 units, independent of output. (1 mark)
c. When labour increases from 3 units to 4 units, the marginal product falls from 5 units to 4
units. Hence, the law of diminishing marginal returns applies to the firm. (3 marks)

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Answers to Exercises (Chapter 11)
2.
a. The law of diminishing marginal returns states that when more units of a variable factor
are added continuously to a given quantity of fixed factors, the marginal product of the
variable factor will eventually decrease, ceteris paribus (including technology).
(3 marks)
b. The table below summarises the marginal product of workers. Assume that the total
product of 30 workers is 200 units.
The worker employed Total product (units) Marginal product (units)
(= 30th – number of absence) (= 200 – Decrease in output) (MPn = TPn – TPn – 1)
30th 200 (= 200 – 0) 20 (= 200 – 180)
th th
29 (= 30 – 1) 180 (= 200 – 20) 25 (= 180 – 155)
th th
28 (= 30 – 2) 155 (= 200 – 45) 30 (= 155 – 125)
th th
27 (= 30 – 3) 125 (= 200 – 75) 40 (= 125 – 85)
26th (= 30th – 4) 85 (= 200 – 115) 30 (= 85 – 55)
th th
25 (= 30 – 5) 55 (= 200 – 145) –
(2 marks; deduct 0.5 marks for each mistake.)
When the number of workers increases from 27 to 28, the marginal product decreases
from 40 to 30 units. Hence, the law is applicable to the factory. (2 marks)

3.
a. i.
Total product Change in total
Capital (units) Labour (units)
(units) product (units)
1 1 10 10 (= 10 – 0)
2 2 25 15 (= 25 – 10)
3 3 41 16 (= 41 – 25)
4 4 50 9 (= 50 – 41)
(0.5 marks for each correct answer)
ii. No, (1 mark)
because the firm is operating in the long run with all factors being variable. (1 mark)

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Answers to Exercises (Chapter 11)
b. i.
Total product (units) Total cost ($) Average cost ($)
10 100 10 (= 100 ÷10)
25 200 8 (= 200 ÷25)
41 300 7.3 (= 300 ÷41)
50 400 8 (= 400 ÷50)
(0.5 marks for each correct answer)
ii. The average cost decreases from $10 to $7.3 when the scale of production increases
from 10 units to 41 units of output. (1 mark)
The average cost increases from $7.3 to $8 when the scale of production further
increases from 41 units to 50 units of output. (1 mark)
Hence, the data illustrate economies of scale and diseconomies of scale, respectively.
(2 marks)

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Answers to Exercises (Chapter 11)