Question

1. The shape of the Long Run Average Cost curve is determined by
   1. The law of diminishing returns
   2. The law of diminishing returns and economies of scale
   3. Economies and diseconomies of scale
   4. The law of diminishing returns and diseconomies of scale
2.   Profit maximizing purchasing of inputs occurs when:
   1. MPa/Pa=MPb/Pb=…=MPn/Pn
   2. VMPa/Pa=VMPb/Pb=…=VMPn/Pn =1
   3. VMPa/MPa=VMPb/Pb=…=VMPn/Pn
   4. MPa/VMPa=MPb/VMPb=…=MPn/VMPn

Answer 1

The law of diminishing returns states that as we add more units of a variable input to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will be increasing at a decreasing rate.

If Long Run Average Cost (LRAC) is falling when output is increasing then the firm is experiencing economies of scale. For example a doubling of factor inputs might lead to a more than doubling of output.
Conversely, When LRAC eventually starts to rise, the firm experiences diseconomies of scale, and, If LRAC is constant, then the firm is experiencing constant returns to scale.

So the suitable answer is "b.The law of diminishing returns and economies of scale"

c. VMPa/MPa=VMPb/Pb=…=VMPn/Pn