PS4_SOL - PAM 200, Intermediate Microeconomics Problem Set...

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PAM 200, Intermediate Microeconomics Problem Set 4 Answer key I. True, False or Uncertain. Explain . No credit given without explanation. Use graphs or algebra to help explain your answer whenever possible (2 points each). 1) A firm that experiences diminishing marginal returns in the short run will have decreasing returns to scale in the long run. False. The law of diminishing marginal returns holds that if only ONE inputs is increased, holding all other inputs and technology constant, the marginal product of that input will diminish eventually. This condition holds regardless of the presence of economies of scale. Returns to scale tell how much output changes if a firm increases ALL its inputs proportionately. Experiences diminishing marginal returns in the short run does not necessarily lead to decreasing returns to scale in the long run. Both constant returns to scale and increasing returns to scale in the long run could have diminishing marginal returns in the short run. 2) Short-run average cost exceeds long-run average cost only when there are economies of scale. False. Short-run average costs exceed long-run average costs because the firm is locked into a certain input mix in the short run that may not be cost minimizing when all inputs are variable. This condition holds regardless of the presence of economies of scale:
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PS4_SOL - PAM 200, Intermediate Microeconomics Problem Set...

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