Ch.7 Costs in Long Run

Question 1

A Period of Time that
All inputs are Variable
& diminishing marginal productivity does NOT apply

Answer 1

Long Run

Question 2

A graph of per unit cost of production in the long run
&
X-Axis =
Y-Axis =

Answer 2

Long Run Average Cost Curve
LRAC (ATC)

X-Axis = Output / period
Y-Axis = Cost / unit

Question 3

A firm can plan in ___ run, but always operates in ___ run

Answer 3

Plan Long Run

Operate Short Run

Question 4

2 Reasons that Size of Premises is Fixed and difficult to move in most cases

Answer 4

1. $$$ & Interrupting business
2. Lease not ended

Question 5

When a Firm’s
Output ↑ % = Input ↑ %

Answer 5

Constant Returns to Scale

only in Long Run
LRAC = Horizontal

△% = (X₂ - X₁) / X₁

Question 6

When a Firm’s
Output ↑ % > Input ↑ %

Answer 6

Increasing Returns to Scale
a.k.a.
Economies of Scale

△% = (X₂ - X₁) / X₁

Question 7

2 Reasons why larger firms produces lower AC than smaller firms

Answer 7

Economies of Scale

1. Technical Economies
   a. adv from labour division
   b. mngt specialization
   c. machine specialization
2. Pecuniary Economies
   a. lower borrowing cost
   e.g. interest rate
   b. buy/sell in bulk
   c. sell by product
   d. lower mktg & advertise cost

Question 8

When a Firm’s
Output ↑ % < Input ↑ %
due to
Bureaucratic Inefficiency in Mngt

Answer 8

Decreasing Returns to Scale
or
Diseconomies of Scale

△% = (X₂ - X₁) / X₁

Question 9

4 Reasons for
Diseconomies of Scale

Answer 9

1. ↑ Lines of communication
2. ↑ Cost of communication
3. Misinterpreting communication
4. Blurred Lines of responsibility & decision making

Question 10

Smallest plant size which achieves
lowest long run avg cost of production

= Right size of the firm

Answer 10

Minimum Efficient Scale

MES

Question 11

3 Possible LRAC Curves
vs firm sizes

1) Wide U
2) Elongated U
3) Narrow U

Answer 11

1) a few Large firms
auto/ pipe/ sattelite/ petro/ tv/ cable..
2) A Variety of firms
pc soft/ estate srv/ meat packing..
3) Small firms
vegetable farm/ small retail..

Question 12

Both Short- & Long- Run Average Costs ↓ if

Answer 12

1. Input factor $ ↓
2. Tech ↑
3. Mergers reduce AFC
   e.g. only 1 HR dept is needed

LRAC Curve shifts ↓

Question 13

Market can be too small
if it limits firm size to output that is

Answer 13

1. < Economic Capacity in Short Run
2. < Min. Efficient Scale in Long Run

Question 14

Adam Smith observed that the Division of Labour was limited by

Answer 14

Market Size