Long run cost maximisation

Question 1

Isocost line

Answer 1

set of input combinations that have the same total cost for the firm

Question 2

Long run total cost curve

Answer 2

describes how minimised level of the cost evolves as output increases, for given input prices (r,w). it is increasing and intersects the origin

Question 3

Economy of scale

Answer 3

average cost is decreasing

Question 4

diseconomy of scale

Answer 4

the average cost in increasing

Question 5

minimum efficient scale

Answer 5

the output level where average cost is minimised

Question 6

Long-run cost minimisation

Answer 6

both inputs L & K are variable
find the optimal combination of inputs to minimise the total cost

Question 7

Long run cost minimisation (formula)

Answer 7

min (L,K) wL + rK s.t. f(L,K) >= q

Question 8

Isocost’s equation

Answer 8

wL + rK = TC0

Question 9

The slope of an isocost

Answer 9

-w/r

Question 10

Analysis of the isocost

Answer 10

the higher the cost, the more rightward shift

Question 11

How to long-run cost minimisation

Answer 11

Tangency implies that at the solution to LR cost minimisation pb,
- the slope of the isoquant is equal to the slope of the isocost
- the optimum is on the isoquant

Question 12

To solve: the slope of the isoquant is equal to the slope of the isocost (formula)

Answer 12

MRTS L,K (L,K) = w/r

Question 13

To solve: the optimum is on the isoquant

Answer 13

f(L,K) =q

Question 14

Long run average cost

Answer 14

LAC(q)= LTC(q)/q

Question 15

Long run marginal cost

Answer 15

LMC= LTC’(q)

Question 16

Since LMC = LTC’(q)

Answer 16

LMC curve intersects the LAC curve at its lowest level