Which of the following statements about cost functions is true?
A) Variable costs will always increase in direct proportion to the quantity of output produced.
B) The less capital equipment employed in the production process relative to labor and other inputs,the longer will be the period of time required to increase significantly the scale of operation.
C) The shape of the firm's long-run cost function is important in decisions to expand the scale of operations.
D) none of the above

Question

Quizplus · Accepted Answer

The shape of the firm's long-run cost function is important in decisions to expand the scale of operations because it determines whether the firm will experience economies of scale or diseconomies of scale as it expands production. A firm experiencing economies of scale will have a downward-sloping long-run average cost curve, meaning that as it produces more, its average cost per unit will decrease. On the other hand, a firm experiencing diseconomies of scale will have an upward-sloping long-run average cost curve, meaning that as it produces more, its average cost per unit will increase. Therefore, understanding the shape of the long-run cost function is crucial in determining whether expansion will be profitable for the firm.

Option A is false because while variable costs may increase with an increase in output, they may not necessarily do so at a constant rate.

Option B is also false because the relationship between capital equipment and the period of time required to increase scale of operations will depend on the specific industry and production process.

Which of the Following Statements About Cost Functions Is True