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Chapter 7: Q 26. (page 184)

What is a long-run average cost curve?

Short Answer

Expert verified

The sum of many short run average cost curves is the long run average cost curve.

Step by step solution

01

Step 1. Introduction

The long run is defined as a time span during which all production parameters, referred to as inputs, are variable and businesses have enough leverage to enter and depart any market or industry.

02

Step 2. Explanation

The long run is defined as a time span during which all production parameters, referred to as inputs, are variable and businesses have enough leverage to enter and depart any market or industry.

The long run average cost curve of a firm illustrates the minimum average total cost at which a firm may achieve a certain amount of production in the long run when all inputs are variable.

With the help of the diagram below, this is explained:

The sum of many short run average cost curves is the long run average cost curve.

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Most popular questions from this chapter

A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work.

A firm had sales revenue of\(1million last year. It spent\)600,000on labor,\(150000on capital and\)200,000on materials. What was the firm’s accounting profit?

What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?

Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run?

Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of 5units that it sells for a price of $25each.

a. What will be the company’s profits or losses?

b. How can you tell at a glance whether the company is making or losing money at this price by looking at average cost?

c. At the given quantity and price, is the marginal unit produced adding to profits?
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