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

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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.

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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.