Exam 9: Long-Run Costs and Output Decisions

Comment on the following statement: "The shape of the long-run average cost curve is determined by diminishing returns."

A railroad company lays a line of track between Houston and Dallas. It provides daily service for industrial customers and ships 5,000 ton-miles per day with a single train and only one departure and arrival at each end. It has an opportunity to purchase a second train that would allow it to ship twice the amount of ton-miles per day. Does this firm face increasing, constant or decreasing returns to scale? Explain.

Why are losses acceptable in the short run but not the long run?

What is meant by decreasing returns to scale?

What does it mean for a firm to be suffering an economic loss? Does this imply that the firm is earning negative profit in the accounting sense? Explain.

What is meant by constant returns to scale?

What is a constant-cost industry? What does the long-run industry supply curve look like for a constant-cost industry?

List three reasons why a firm might experience economies of scale.

The figures below show the supply and demand for a perfectly competitive industry and the cost curves for a representative firm in the industry. Explain what will happen in the long run in this industry.

How do decreasing returns to scale affect the shape of the long-run average cost curve?

What is the shutdown point?

Why cannot firms leave the industry in the short run?

Assume two firms have the same total costs of production. Firm A's average variable cost if $5 per unit and firm B's average variable cost is $7. Both firms have an average total cost of $8. If the current market price is $6 and remains unchanged what action will both firms take in the short run and the long run?

The Binkle Binder Corporation sells 3-ring binders in a perfectly competitive market at a price of $3 each. The firm's marginal cost, average total cost, and average variable cost curves can be represented by the following: Should the firm continue to operate in the short run? Explain.

If the fixed costs for a firm rise what will be the impact on the marginal cost, average variable cost and average total cost curves? Explain.

Lentz's Incorporated sells paper in a perfectly competitive market at a price of $2 per ream. At the profit-maximizing (cost-minimizing) level of output, average total cost is $2.50 per ream and average variable cost is $1.95 per ream. Should the firm continue to operate in the short run? Explain.

Comment on the following statement: "If a firm shuts down in the short run, it will earn zero economic profit."

Assume there are three firms in an industry as depicted in the graphs below. Based on this information construct the industry supply curve.

Using Figure 9.1, explain what a firm would do in the short run if the market price of its product were at P₃ and it produced Q₃. Is the firm earning an economic profit? Explain.

The table below represents cost data for Amalgamated Plastics Inc., which sells bubble wrap for shipping in a perfectly competitive market for a price of $6 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 long run? Explain.