ECO101H1 Lecture 13: Lecture 13-Production Function

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copperclam445

1 Aug 2010

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Thursday, October 29th, 2009. Production Function

)LUP¶V/RQJ-run Average Total Cost Schedule:

1. ,QVKRUWUXQ*0PXVWKLUHPRUHZRUNHUVWRLQFUHDVHRXWSXW³/DZRI'LPLQLVKLQJ

5HWXUQ´DSSOLHV

2. In long run, GM can build more assembly paints as well as hire more workers

2.1 ³/DZRI'LPLQLVKLQJ5HWXUQV´GRHVnot apply

2.2 MP does not necessarily fall after some point Æ MC does not necessarily rise

3. Suppose firm doubles all inputs

a) Output doubles (constant returns to scale) Æ ATC unchanged

b) Output less than doubles (diseconomies of scales) Æ ATC increases

c) Output more than doubles (economies of scale) Æ ATC falls

Long-run Average Total Cost Curve

ATC

Constant Returns to Scale

The property whereby long-run

average total cost stays the same

as the quantity of output changes

ATC

Diseconomies of Scale

The property whereby long-run

average total cost rises as the

quantity of output increases

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Related Questions

Take a look at the following information and answer the question below:

If long-run average costs are constant with respect to output, then you have constant returns to scale.

If long-run average costs rise with output, you have decreasing returns to scale or diseconomies of scale.

If long-run average costs fall with output, you have increasing returns to scale or economies of scale. Every company is trying to reach economies of scale. However, it is not always possible. What are some of the things that could keep a company from reaching economies of scale? Why?