ECO100: Chapter 8 Notes-Producers in the Long Run
Allocative vs. technical efficiency: allocative efficiency means that the marginal cost of each good
produced is equal to its _____________________. Technical efficiency means that a given number of
inputs are combined in such a way as to maximize the level of output (e.g. costly resources are not
under-utilized or wasted)
We said before that the goal of firms is to_______________________, however, in order to do this,
firms must choose between multiple technically efficient combinations of labor and capital to produce a
given level of output at the ______________ cost. (If a firm is not __________________, then they are
by definition NOT __________________________).
___________________________ is necessary for a firm to ___________________ profits.
Long-run cost minimization condition:
The firm wants to get the same _______________________ out of each input, otherwise it could
reallocate its spending and produce a higher quantity or produce the same level of output at a lower
The Principle of Substitution: Methods of production will change as _____________________ of inputs
change. Firms will use relatively _________________ of the cheaper input and relatively ___________
of the more expensive input.
Minute Paper-take out a sheet of paper, put your first name, last name, and student ID number on the
sheet of paper and answer the following.
Assume a mechanized plow costs $10/hour to operate and can plow 1 acre per hour in all countries.
Now assume that in Country A, labor costs $2/hour and a man or woman can plow ¼ acre per hour;
whereas, in Country B, labor costs $15/hour and a man or woman can also plow ¼ acre per hour.
How will the cost minimizing input choices differ between Countries A and B assuming that a firm wants
to plow 5 acres per hour? Long-Run Average Cost Curve (LRAC): the curve showing the lowest possible cost of producing each level
of output when all inputs are __________________. Thus it is the boundary between cost levels that
are __________________ and those that are _________________ at a given le