Chapter 7: Long Run Cost Compared with Short Run Costs
Supplemental Instruction
Iowa State University / Leader: / Veronica
Course: / Econ 101
Instructor: / Kreider
Date: / 10-28-14
(1) Output (per Day) / (2) Capital / (3) Labor / (4) TFC / (5) TVC / (6) TC / (7) MC / (8) AFC / (9) AVC / (10) ATC
0 / 1 / 0 / $ 150 / $ 0 / $ 150 / — / — / —
$ 10/3
30 / 1 / 1 / $ 150 / $ 100 / $ 250 / $ 5 / $ 10/3 / $25/3
$ 10/4
70 / 1 / 2 / $ 150 / $ 200 / $ 350 / $ 15/7 / $ 20/7 / $5
$ 2
120 / 1 / 3 / $ 150 / $ 300 / $ 450 / $ 5/4 / $ 10/4 / $ 45/12
$ 10/4
160 / 1 / 4 / $ 150 / $ 400 / $ 550 / $ 15/16 / $ 10/4 / $ 55/16
$ 10/3
190 / 1 / 5 / $ 150 / $ 500 / $ 650 / $ 15/19 / $ 50/19 / $ 65/19
$ 5
210 / 1 / 6 / $ 150 / $ 600 / $ 750 / $ 15/21 / $ 60/21 / $ 75/21

Table 1: Clean ‘n’ Shine Output

  1. Over what range of output does Clean ‘n’ Shine experience increasing marginal returns to labor? Form 70 to 210
  2. Over what range does it experience diminishing marginal returns to labor?

From 0 to 120

  1. As output increases, how does average fixed costs behave?

As output increases average fixed costs decrease

  1. As output increases, how does marginal cost, average variable cost, and average total cost behave?

As output increases marginal cost first decreases then increases, and Average total cost first decreases then increases.

  1. Looking at the numbers in the table, but without drawing any curves, what is the relationship between MC and AVC? What about the relationship between MC and ATC?

The ATC is above the AVC curve at all times. Also the MC crosses the AVC and ATC at their respective minimums.

  1. Fill in Chart:

Term / Symbol and/or Formula / Definition
Long-run total cost / LRTC / The cost of all inputs in the long run
Long-run average total cost / LRATC = LRTC/Q / Cost per unit in the long run
  1. Define:
  2. Diseconomies of Scale: Long-run average total cost increases as output increases.
  3. Constant Returns to Scale:Long-run average total cost is unchanged as output increases.
  4. Minimum efficient Scale:The lowest output level at which the firm’s LRATC curve hits bottom.
  5. Economies of Scale:Long-run average total cost decreases as output increases.
  6. The following table gives the short-run and long-run total costs for various levels of output of Consolidated National Acme, Inc.:

Q / TC1 / TC2
0 / 0 / 350
1 / 300 / 400
2 / 400 / 435
3 / 465 / 465
4 / 495 / 505
5 / 540 / 560
6 / 600 / 635
7 / 700 / 735
  1. Which column, TC1 or TC2, gives long-run total cost, and which gives short-run total cost? How do you know?

TC1 is Long run & TC2 is short run. You know because TC1 has no fixed costs & in long run cost curves all inputs are variable.

  1. For each level of output, find short-run TFC, TVC, AFC, AVC, and MC.
  1. At what output level would the firm’s short-run and long-run input combinations be the same?At a quantity of 3
  1. Over what range of output do you see economies of scale? Diseconomies of scale? Constant returns to scale?

For TC1: Economies of Scale from 0-6. Constant returns to scale from 6-7. No Diseconomies of Scale

For TC2:Economies of Scale from 0-7. No Constant returns to scale. No Diseconomies of Scale

5. “If a firm has diminishing returns to labor over some range of output, it cannot have economies of scale over that range.” True or false? Explain briefly.True because they are opposites of each other.

  1. Fill in the Blank:
  2. In the long run, there are no fixed inputs or fixed costs; all inputs and all costs are variable.
  3. The long-run total cost of producing a given level of output can be less than or equal to, but not greater than, the short-run total cost (LRTC ≤ TC)
  4. The long-run average cost of producing a given level of output can be less than or equal to, but not greater than, the short-run average total cost(LRATC ≤ ATC).
  5. A firm’s LRATC curve combines portions of each ATC curve available to the firm in the long run. For each output level, the firm will always choose to operate on the ATC curve with the lowest possible cost.
  6. in the short run, a firm can only move along its current ATC curve. In the long run, however, it can move from one ATC curve to another by varying the size of its plant. As it does so, it will also be moving along its LRATC curve.
  7. When long-run total cost rises proportionately less than output, production is characterized by economies of scale, and the LRATC curve slopes downward.
  8. when long-run total cost rises more than in proportion to output, there are diseconomies of scale, and the LRATC curve slopes upward.