Long-run Production

Question 1

Write out the Long-run Average Cost diagram

Answer 1

X - axis Average cost, y - Axis output
Curve is a U
- First downward slope section of U is EOS (AC decreasing)
- The lowest point is the Min AC cost - When % increase in inputs = %increase in output
- Upwards slope of U is DOS (AC increasing)

Question 2

What equation do you use to work out %Change

Answer 2

New Price - Original Price (P2-P1) / Original Price (P1)

x 100

Question 3

Why are SR and LR curves U-Shaped (different reasons)

Answer 3

• SR = Due to law of diminishing returns
• LR = Due to EOS + DOS

Question 4

What is the formula for Total Revenue (TR)

Answer 4

PxQ

Question 5

What is the formula for Average Revenue (AR)

Answer 5

TR / Q = PxQ / Q

Question 6

Marginal Revenue (MR)

Answer 6

△TR (TR2-TR1)/ △Q

Question 7

Formula for PED +inelastic vs elastic?

Answer 7

%△Qd / %△P

• Inelastic = Less than 1
  Elastic = Greater than 1
  Perfectly / Unitary Elastic = 1

Question 8

What is the formula for Profits

Answer 8

TR-TC

Question 9

Profit maximisation explained + evaluation points
(graph, assumptions, evaluation)

Answer 9

graph
- Q= where MC ( J ) meets MR(1/2 D)
- P follow line up to D
–> dif betwen point this meets AC and P is SNP

Assumes
- Interests of owners + shareholders are most important
Evaluation

pros
- Shareholders benefit from higher dividends
- Government benefits, tax revenue↑
- ↑Dynamic Efficiency–> Consumer benefit in LR

cons
- Difficult to determine MC&MR
- Consumers are worse off, P↑ Q↓ (C.S.↓)
- In specific cases other strats work better e.g. firm wants to ↑Market Share (needs lower P)

Question 10

Satisficing explained + evaluation points

Answer 10

• Due to principle-agent problem, owners and managers have different goals.
• Managers likely to follow profit satisficing, making enough profit to keep owners happy whilst following other objectives to benefit themselves

Evaluation
pros
- easy to achieve IRL
Cons
- Salary↑ –> ↑Costs –> Profit↓