Costs and time

Question 1

Define the short run

Answer 1

The period of time over which a firm is free to vary its inputs of one factor of production (labour) but faces fixed inputs from other factors of production

Question 2

Define the long run

Answer 2

The period of time in which all factors of production are variable

Question 3

Define sunk costs with an example

Answer 3

Incurred by a firm that cannot be recovers if the firm ceases trading eg advertisement

Question 4

Give examples of differing short runs for firms

Answer 4

Deliveroo might have a short term of a couple of weeks, whereas a short run for a steel mill might be a few years

Question 5

Why does the marginal cost curve cross the average cost curve at the lowest point on it?

Answer 5

Marginal cost decreases with output and then increases with output (economies and diseconomies of scale), and so does AC. When the marginal cost is below the average, it is bringing it down. When marginal cost is above the average cost it brings it up. So when the two cross, the marginal cost isn’t changing the average because it is equal they are equal.