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Chapter 11: Problem 1

What is the difference between total cost and variable cost in the long run?

Short Answer

Expert verified
In the long run, total cost and variable cost are essentially the same as all costs become variable. Firms can adjust all inputs in response to market conditions - including those that are usually fixed in the short run.

Step by step solution

01

Define Total Cost

Total cost (TC) is the sum of all costs incurred by a firm in the process of producing goods or services. It includes both fixed costs (FC) and variable costs (VC). Fixed costs are costs that do not change regardless of the number of units produced. Variable costs, on the other hand, change depending on the number of units produced. Therefore, TC = FC + VC.
02

Explain Variable Cost

Variable costs are expenses that change in proportion to the amount of goods or services a business produces. The more units a firm produces, the higher the variable costs. For example, raw materials and direct labor are variable costs as they increase with the level of output.
03

Compare in the Long Run

In the long run, all costs are variable. This means a firm can adjust all its inputs in response to market conditions, even those that are usually fixed in the short run like machinery, buildings etc. Hence, in the long run, total cost and variable cost are essentially the same as there are no fixed costs.

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Most popular questions from this chapter

Devra Gartenstein, a restaurant owner, made the following observation about preparing food: "Cooks become increasingly less productive as a kitchen becomes increasingly crowded." a. What do economists call the problem she is describing? What are its implications for the marginal product of labor for cooks? b. Do restaurant owners have a solution to this problem in the long run? Briefly explain.

Where does the marginal cost curve intersect the average variable cost curve and the average total cost curve?

Older oil wells that produce fewer than 10 barrels of oil a day are called "stripper" wells. Suppose that you and a partner own a stripper well that can produce 8 barrels of oil per day, and you estimate that the marginal cost of producing another barrel of oil is \(\$ 80 .\) In making your calculation, you take into account the cost of labor, materials, and other inputs that increase when you produce more oil. Your partner looks over your calculation of marginal cost and says: "You forgot about that bank loan we received two years ago. If we take into account the amount we pay on that loan, it adds \(\$ 10\) per barrel to our marginal cost of production." Briefly explain whether you agree with your partner's analysis.

(Related to the Apply the Concept on page 376) An article in the New York Times on the airline industry described airlines as being "burdened by high fixed costs." What are likely to be the most important fixed costs for an airline? Are airlines likely to have particularly high fixed costs relative to their variable costs when compared with, say, an Old Navy clothing store or a Panera Bread restaurant? Briefly explain.

In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods: $$ \begin{array}{l|c|l} \hline \text { Scroll } & \text { Codex } \\ \hline \begin{array}{l} \text { Cost of writing } \\ \text { (wage of a scribe) } \end{array} & 11.33 \text { drachmas } & 11.33 \text { drachmas } \\ \hline \text { Cost of paper } & 16.50 \text { drachmas } & 9.25 \text { drachmas } \\ \hline \end{array} $$ Another scholar points out that a significant fixed cost was involved in producing a codex: In order to copy a codex \(\ldots\) the amount of text and the layout of each page had to be carefully calculated in advance to determine the exact number of sheets \(\ldots\) needed. No doubt, this is more time-consuming and calls for more experimentation than the production of a scroll would. But for the next copy, these calculations would be used again. a. Suppose that the fixed cost of preparing a codex was 58 drachmas and that there was no similar fixed cost for a scroll. Would an ancient book publisher who intended to sell 5 copies of a book be likely to publish it as a scroll or as a codex? What if the publisher intended to sell 10 copies? Briefly explain. b. Although most books were published as scrolls in the first century C.E., by the third century, most were published as codices. Considering only the factors mentioned in this problem, explain why this change may have taken place.
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