Econ 601: Basic Economic Analysis
Assignment #3
Answer Key
Text Questions:
1. A firm incurs fixed costs over the short-run even when output is zero because fixed
costs are independent of output. A fixed cost could be the monthly rent on a store or
building, insurance premiums, or other charge that must be paid regardless of the level of
output. Short-run variable costs increase slowly at smaller levels of output because the
added variable factors of production allow the firm to make more efficient use of its fixed
factor of production. Short-run variable costs increase rapidly at larger levels of output
because the added variable factors begin to overwhelm or overload the fixed factor of
production and diminish returns occur.
2. The Law of Diminishing Returns states that as additional units of a variable factor are
added to a fixed factor, beyond some point the additional product from each additional
unit of the variable factor decreases. It affects the short run because in the short run some
factors of production are fixed. It does not affect the long run because in the long run
there are no fixed factors.
3. Here is the table
Output
TFC
0
$100
1
100
2
100
3
100
4
100
5
100
6
100
Multiple Choice:
1.B
2.B
3.C
4.A
5.A
6.A
7.C
8.B
9.C
10.C
TVC
$0
50
80
110
180
300
500
TC
$100
150
180
210
280
400
600
ATC
$150
90
70
70
80
100
MC
$50
30
30
70
120
200