Supply Production, Costs, and Profits

1. Give a brief summary of economic costs. In the short-run, why might a firm still operate even when there is a loss.

2 Explain the law of diminishing returns in your own words. This idea can be applied to almost anything in economics. Think about your own utility from consumption. Give a personal example of diminishing utility.

3. Read the following short article:

Vargas, L. (2001). “Maquiladoras: Impact on Texas Border Cities,” in The Border Economy, Federal Reserve Bank of Dallas. Retrieved on February 18, 2011 from:

How does this article apply the marginal decision rule to the problem of choosing the mix of factors or production (capital intensive vs. labor intensive methods of production)? How do maquiladoras benefit the U.S. economy?

4. Read the following short article:

Economic Focus. (2003). “When Small is Beautiful” The Economist. Retrieved February 18, 2011 from:

Some of the concepts explored in this module not only apply to firms, but can be applied to countries. Just as business have an optimal size, so might countries. They, too, experience increasing, as well as decreasing returns to scale. What are some advantages and disadvantages to large countries?


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