Exam 9: Long-Run Costs and Output Decisions

The table below represents cost data for Matters & Sons which sells paper plates in a perfectly competitive market for a price of $2 per package: How many units of the output will this firm produce? How much profit will it earn? Will the firm choose to operate in the short run? Will the firm choose to operate in the long run? Explain.

To the casual observer it is often difficult to understand how a company would spend several million dollars building a plant or other structure and then simply stop and abandon the project midway. How can this be justified on economic grounds?

The table below represents cost data for Vester, Incorporated, which sells tennis balls in a perfectly competitive market for a price of $4 per package: How many units of the output will this firm produce? How much profit will it earn? Will the firm choose to operate in the short run? Will the firm choose to operate in the long run? Explain.

Comment on the following statement: "The shape of a firm's long-run average cost curve is determined by both external and internal economies (or diseconomies) of scale."

If a firm is earning just enough to cover all its economic profits does that mean it's not making a profit?

Comment on the following statement: "When firms are earning positive profits, the industry supply curve will shift to the right."

If the long-run average cost curve for the industry is flat what implication does this have for the relationship between the average cost curves for small and large firms?

Toothpicks are sold in a perfectly competitive market. The market price is currently $3 per box of one hundred toothpicks. At its current level of production, a representative firm in the toothpick industry is producing at a level of output such that long-run average cost is $3.25 per box of one hundred toothpicks. Given this information, is the toothpick industry in equilibrium? Explain.

Flowers.com is earning a total revenue of $100,000 per year. Its annual total fixed costs are $25,000 and its annual total variable costs are $75,000. What is the operating profit for Flowers.com? What is economic profit?

If marginal costs are constant what will the average variable cost curve look like? What about the average total cost curve?

What is meant by increasing returns to scale?

Explain the relationship between price, short-run marginal cost, short-run average cost and long-run average cost in the final long-run competitive equilibrium condition. What are economic profits in this long-run equilibrium condition?

What is the optimal scale of plant?

A purely competitive firm is faced with a marginal revenue curve that lies everywhere below the average variable cost curve. Would this firm be able to operate in the short run? Explain.

What is a long-run average cost curve?

Comdex Computer Company is producing at a price of $10 with an average total cost of $12 and a fixed cost of $300. The firm is currently producing 100 units. What are the operating profits of this firm? What are the economic profits of this firm?

The Lotsa Pasta Company sells pasta in a perfectly competitive market at a price of $2 per pound. Its marginal cost, average variable cost, and average total cost curves can be seen below: Find the profit-maximizing level of output and mark it q*. Shade in the area of profit earned by the firm. Is it positive or negative? How do you know?

List two things that can cause the industry supply curve to shift.

The table below comes from cost data from the long run total cost function. It shows the monthly output and total monthly cost of USB drives for three firms in the industry. Given the information in the table, can we draw any conclusions about the returns to scale in the USB drive industry? If so, what does the information suggest about the shape of the long-run average cost curve?

What does it mean if an industry has external economies?