AQA A-Level Economics (Year 2) -
Production, Costs and Revenues June
2024 Exam Question and Answers
What is a firm? - Answer>> A productive organisation which
sells its output of goods or services commercially.
What are the marginal returns of labour? - Answer>> The
addition to total output brought about by adding one more worker
to the labour force, holding all the other factors of production
fixed.
What does the law of diminishing marginal returns state? -
Answer>> As we add more units of a variable input to fixed
amounts of land and capital, the change in total output will first
rise but then fall.
Where is the law of diminishing marginal returns valid? -
Answer>> In the short-run ONLY.
Why does the law of diminishing marginal returns occur? -
Answer>> Because (in this example), labour is being added to
a fixed amount of capital. This eventually leads to too many
workers which get in each other's way and the marginal returns of
labour falls. There is a sub-optimum capital:labour ratio.
What is average returns of labour? - Answer>> Total output
divided by the total number of workers employed.
What is total returns of labour? - Answer>> The total output
produced by all the workers employed by a firm.
, What is the key difference between returns to scale and
economies of scale? - Answer>> Returns to scale are part of
long-run *production* theory.
Economies of scale are part of long-run *cost* theory.
What is returns to scale? - Answer>> The rate by which output
changes if the scale of all the factors of production is changed.
What is increasing returns to scale? - Answer>> When the
increase in the scale of all the factors of production causes a
more than proportionate increase in output.
What is constant returns to scale? - Answer>> When the
increase in the scale of all the factors of production causes the
same proportionate increase in output.
What is decreasing returns to scale? - Answer>> When the
increase in the scale of all the factors of production causes a less
than proportionate increase in output.
What is the link between returns to scale and economies of
scale? - Answer>> Increasing returns to scale leads to falling
long-run average costs or economies of scale.
This is because output increases faster than inputs, so if wage
rates and other factor prices are the same at all levels of outputs,
the money cost of producing a unit of input must fall.
What is the link between SRATCs and LRATCs? - Answer>> In
the long run a firm can move from one short-run cost curve to
another. The line drawn as a tangent to the set of SRATC curves
is the LRATC curve.
Each SRATC curve represents a different scale of capacity that is
fixed in the short run.
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