Changes

*'''variable inputs''' (inputs that are increased to produce more Q in the short run)

*'''variable inputs''' (inputs that are increased to produce more Q in the short run)

*'''fixed inputs''' (inputs that cannot be increased in the short run to produce more Q)

*'''fixed inputs''' (inputs that cannot be increased in the short run to produce more Q)

*'''returns to scale''' (increasing, decreasing or constant?  Look at whether a firm's long run average total costs -- AVC=TC/Q -- increases when the firm's size increases)  Note that "economies of scale" is the same as "increasing returns to scale"; "diseconomies of scale" is the same as "decreasing returns to scale."

*'''returns to scale''' (increasing, decreasing or constant?  Look at whether a firm's long run average total costs -- ATC=TC/Q -- increases when the firm's size increases)  Note that "economies of scale" is the same as "increasing returns to scale"; "diseconomies of scale" is the same as "decreasing returns to scale."

*'''income effect'''

*'''income effect'''

*'''substitution effect'''

*'''substitution effect'''

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

By process of elimination, the correct answer must be (d).  We can confirm it is right by thinking back to the Wal-Mart example:  as it increases its "scale", it increases the quantity of its goods, and that enables it to lower the average costs for each good and then lower the prices.  Its ATC decreases as it increases its size; it has "economies of scale" or "increasing returns to scale."

By process of elimination, the correct answer must be (d).  We can confirm it is right by thinking back to the Wal-Mart example:  as it increases its "scale", it increases its quantity of its goods, and that enables it to lower the average costs for each good and then lower its prices.  Its ATC decreases as it increases its size; it has "economies of scale" or "increasing returns to scale."

== Assignment ==

== Assignment ==