Question

A firm employs labor and capital to produce its output (Q). Labor is a variable input and capital input is fixed.

a) Can a firm produce more output in short run by keeping its capital level (K), if yes, how?

b) if new output in short run is Q¹ (Q¹ > Q), Can a firm produce Q¹ output in long run, if yes, how?

c) Will short run total cost (at K¹ = K) be higher or lower than long run total cost for output Q¹?

d) Will short run average cost (at K¹ = K) be higher or lower than long run average cost for output Q¹?
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Answer 1

Answer :-

➮ Yes. This production function says that a firm can produce one unit of output for every unit of capital or labor it employs.

➮ The long-run equilibrium requires that both average total cost is minimized and price equals average total cost (zero economic profit is earned). In order to find the long-run quantity of output produced by your firm and the good's price, you take the following steps: Take the derivative of average total cost.

➮ Long run total cost refers to the minimum cost of production. It is the least cost of producing a given level of output.

★ Thus, it can be less than or equal to the short run average costs at different levels of output but never greater.

➮ When marginal cost is less than average variable or average total cost, AVC or ATC must be decreasing. When marginal cost is greater than average variable or average total cost, AVC or ATC must be increasing.

★ The point at which marginal cost equals average total cost (MC = ATC) is known as the break-even point.

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Answer 2

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The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run. In the long run the general price level, contractual wages, and expectations adjust fully to the state of the economy.Let us learn about the Derivation of Long Run Average Cost (LAC) Curve. Long run is that time period when a firm can change all its inputs. In fact, there are no fixed inputs in the long run; all inputs are variable. Thus, in the long run, there is no fixed cost; all costs are variable.