Chapter 11: Firm Behaviour - Long Run Production Costs

Question 1

What would long run production costs look like?

Answer 1

• what will costs look like if firms can choose any combination of inputs for each level of outputs?
• aka for any quantity Q, a firm can choose the combination of capital K and labour L that are the lowest cost combination
  see example slide 45

Question 2

For each K, we can find the L that can give us a quantity of a number. the firm chooses the least cost combination. Obviously it only gives us one point on the LR total cost curve, so how do we get other points?

Answer 2

• repeat for other levels of Q
  what is the least cost combination of K and L if Q = 100?
• this will give us the LR Total Cost Curve
• from that we can determine the LRATC curve (LRTC/Q)

Question 3

What is the LRATC curve?

Answer 3

long run average total cost
- the cost per unit when the firm can alter ALL of its inputs

Question 4

What is the relationship between short run and long run average total cost?

Answer 4

LRATC less than or equal to SRATC
- the long run costs of production can be less than or equal to, but not greater than the short run costs of production

Question 5

Why are long run costs never more than short run costs?

Answer 5

• because the firm faces constraints in the short run, but not in the long run
  see eyelash graphs LOL

Question 6

Based on those eyelash graphs, why do costs NOT fall and then rise like that? (4)

Answer 6

1) NOT due to diminishing marginal product bc that is why SRATC curve increases
- diminishing marginal product only occurs when there is a fixed input, hence a short run concept

2) NOT due to changing factor prices
- remember ceteris paribus, so factor prices are kept constant and all that changes is the Q