Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 7: Q.35 (page 185)

It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.

Short Answer

Expert verified

Firms will operate in the long run regardless of the costs paid; they will fall into the variable cost category.

Step by step solution

01

Step 1. Introduction

The long run is defined as a span of time during which no production occurs and there are no obstacles to entry or leave from an industry.

The term "short run" refers to a time span in which some aspects are constant while others are variable, and there are restrictions on entering or exiting an industry.

02

Step 2. Explanation

In the near run, both fixed and variable costs exist. Fixed costs are costs that stay constant regardless of output volume.

Variable costs are those that change depending on the production. As with labor, rent, and other expenses, the higher the production, the higher the cost.

In the long run, the corporation will use alternative technologies for its input in order to produce a high-quality output. The companies will its way to manufacture to its lowest cost possible and that's when economies of scale come to play.

A business that is profitable in the short term may be profitable in the long run if it can find a way to operate with a lower-cost alternative technology.

Because production increases, the average cost decreases, the company will need to increase its productivity.

So, in the end, firms will operate in the long run regardless of the costs paid; they will fall into the variable cost category.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is $1,000. What does the average fixed cost curve look like? Use your response to explain what “spreading the overhead” means.

Return to Table 7.2. In the top half of the table, at what point does diminishing marginal productivity kick in? What about in the bottom half of the table? How do you explain this?

Average cost curves (except for average fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape?

What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?

A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method choices are: Method 1: 50 units of labor, 10 units of capital Method 2: 20 units of labor, 40 units of capital Method 3: 10 units of labor, 70 units of capital If hiring labor for the winter costs \(100/unit and a unit of capital costs \)400, what is the best production method? What method should the company use if the cost of labor rises to $200/unit?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free