Assignment:
Outline for Lecture 15
Long-Run Production Costs
The Long-Run Cost Curve (five plant sizes)
Suppose that a firm can operate in five alternative plants in the short run, Plants 1 through 5, with respective short-run average total cost curves (ATC1 through ATC5) illustrated by Figure 9.7.
In this illustration, vertical white lines show levels of output at which firm should change its plant to achieve the lowest average total cost.
To see why, suppose that firm produces an output of less than 20 units, say 15 units. In this case, lowest average total cost is achieved in Plant 1 because ATC1 lies below all other ATC curves for 15 units. Provided that plant is a variable resource in the long run, firm chooses Plant 1, indicating that blue section of ATC1 is part of firm's long-run average total cost curve for output levels below 20 units.
Now, suppose firm raises production to somewhere between 20 and 30 units, say 25 units. In this second case, lowest average total cost is achieved in Plant ____ because ____ lies below all other ATC curves for 25 units. Provided that plant is a variable resource in the long run, firm chooses Plant ____, indicating that blue section of ____ is part of firm's long-run average total cost curve for output levels between 20 and 30 units.
Similarly, blue section of ____ is part of long-run average total cost curve for output levels between 30 and 50 units, blue section of ____ is part of long-run average total cost curve for output levels between 50 and 60 units, and blue section of ____ is part of long-run average total cost curve for output levels above 60 units.
Given these five cases illustrated by Figure 9.7, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain.
The Long-Run Cost Curve (unlimited plant sizes)
The blue long-run average total cost curve in Figure 9.7 is drawn under the assumption that firm can operate in five alternative plants in the short run. However, in modern manufacturing industries (i.e. automobiles, pharmaceuticals, etc.) the number of possible plant sizes is many more than five.
In line with this reasoning, each red average total cost curve in Figure 9.8 represents a possible plant size in the short run.
Given all these red curves illustrated by Figure 9.8, how do we obtain long-run average total cost curve? Is it smooth or bumpy? Explain.
Economies and Diseconomies of Scale
Shape of long-run average total cost curve (Figures 9.8 and 9.9) is explained via economies and diseconomies of scale.
Economies of Scale
In the upper panel of Figure 9.9, economies of scale corresponds to ____ part of the curve; in the output range between zero and q1, average total cost ____ as production rises in the long run.
Explain economies of scale: why is average total cost decreasing with rising output?
Diseconomies of Scale
In the upper panel of Figure 9.9, diseconomies of scale explains ____ part of the curve; in the output range above than q2, average total cost ____ as production rises in the long run.
Explain diseconomies of scale: why is average total cost increasing with rising output?
Attachment:- Assignment.rar