ECO 1104 Lecture Notes - Lecture 15: Substitute Good, Demand Curve, Market Power

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Avc is u-shaped and crosses mc at lowest point of avc. Difference between atc and avc is afc. There are fixed costs (contracts that cannot be broken) Maximize profit or minimize loss given your constraints. Long run: for any possible level of q there is an ideal production process. I. e. a level of output (q) then you assemble the best production process (ex. factory) to achieve that output. Economies of scale: increasing returns to scale (left side of atc) Diseconomies of scale: decreasing returns to scale (right side of atc) Constant returns to scale: keep the costs the same but increase the size of the firm. Technological advancement becomes worthwhile if you are producing at larger and larger scales. The products from all the producers are the same. All are perfect substitutes for each other. In a competitive market, price is established by the market not by the firm. The company takes the market price as it is given.

Related Questions

Why does the short-run average total cost (ATC) curve of a firm tend to be U-shaped?

a) larger firms always have lower per-unit costs than smaller firms.

b) at low levels of output, AFC will be high, while at high levels of output MC will be high due to diminishing returns.

c) diminishing returns will be present when output is small, and high AFC will push per unit cost to higher levels when output is large.

d) diseconomies of scale will be present at both small and large output rates.

harlequinlouse1

36) A firm encountering economies of scale over some range of output will have a:

a) rising long-run average cost curve.

b) falling long-run average cost curve.

c) constant long-run average cost curve.

d) rising, then falling, then rising long-run average cost curve.

37) When a firm doubles its inputs and finds that its output has more than doubled, this is known as:

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) a violation of the law of diminishing returns.

38) The larger the diameter of a natural gas pipeline, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of:

a) economies of scale.

b) normative economies.

c) diminishing marginal returns.

d) an increasing marginal product of labor.

39) If all resources used in the production of a product are increased by 20 percent and output increases by 20 percent, then there must be:

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) increasing the average total costs.

40) Economies and diseconomies of scale explain why the:

a) short-run average fixed cost curve declines so long as output increases.

b) marginal cost curve must intersect the minimum point of the firm's average total cost curve.

c) long-run average total cost curve is typically U-shaped.

d) short-run average variable cost curve is U-shaped.

jadeshark411

3. A firm has a long-run production function:

(a) In the short run, K = 81 is fixed. Find the short-run production function. What is the marginal product of labor in the short-run?

(b) If w = 10 and r = 15.24, find the short-run cost function. To do this, first, figure out how many workers are needed to produce Q units of output, and then add up the (fixed) SR cost of capital and the cost of labor as a function of Q. How many workers are needed to produce Q = 10?

(c) Write down equations for an average total cost (ATC) and average variable cost (AVC) as a function of Q. What is ATC when Q = 10? What as AVC when Q = 10?

(d) Write down the equation for the marginal cost (MC) as a function of Q. What is the marginal cost of producing Q = 10 in the short run?

(e) Verify that MC = w*MPL, evaluating the marginal product of labor from part (3a) at the number of workers needed to produce 10 units of output.

(f) In the long run, both capital and labor are variable. Find the marginal product of labor and the marginal product of capital. Find the marginal rate of technical substitution. On a properly-labeled graph, draw an isoquant for Q = 10.

(g) Does the production function exhibit increasing, decreasing, or constant returns to scale?

(h) Find the lowest cost method of producing Q = 10 (two unknowns: K and L). To do this, equate the MRTS with the input price ratio w r (one equation) and use the isoquant for Q = 10 as the second equation.

(i) Use the fact that the cost, in the long run, is wL + rK to find the LR cost of producing Q = 10. What is the long-run average cost (LRAC) at Q = 10?

(j) (Hard) More generally, use the MRTS and the production function to find the cost of producing any quantity Q. To do this, repeat the above exercise but keep Q as an (unknown) variable, and solve for K and L as functions of Q.

(k) On a properly labeled graph, depict ATC from part (3b) and LRAC from part (3j). Why is LRAC everywhere below ATC?

(l) What is the production level at which SRAC is minimized?

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ECO 1104 Lecture Notes - Lecture 15: Substitute Good, Demand Curve, Market Power

ECO 1104 Full Course Notes

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