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L13 - Production and Cost Schedules - 10232013.pdf

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James Pesando

Review 1. Production Function Short-Run: Variable Factor (labour) Fixed Factor (capital) 2. Law of Diminishing Returns In short run, marginal product (MP) of variable factor eventually declines 3. MP and MC MP increases => MC decreases MP decreases (eventually) => MC increases (eventually) Diagram #2 MC intersects ATC at minimum of ATC Short run (there is a fixed factor of production) : ATC is U - shaped Long run (no fixed factor) : ATC is not necessarily U - Shaped Firm's Long run ATC Schedule 1. In short run, GM must hire more workers to increase output ("LAw of Diminishing Returns" applies) 2. In long run, GM can build more assembly plants as well as hire more workers 2.1 "Law of Diminishing Returns" does not apply 2.2 MP does not necessarily fall after some point -> MC does not necessarily rise 3.Suppose firm doubles all inputs (a) Output doubles (constant returns to scale) -> ATC unchanged (b) Output less than doubles (diseconomies of scale) -> ATC increases (c) Output more than doubles (economies of scale) -> ATC falls 4. Assumes that costs of inputs - such as wages for workers - do not change when firm doubles all inputs (firm is a "price take") Long - Run Average Total Cost Curve Economies of Scale: Specialization (for example) Diseconomies of Scale: Organization and Co-ordination Costs 2011 Exam #45 A firm produces its output with one variable factor (labour) and one fixed factor (capital). If a firm's total fixed cost is $200, and its total costs is $400 to produce one unit and $620 to produce two units, the firm is a) already facing diminishing returns b) not yet facing diminishing returns c) facing constant returns (concept long run) d) already facing increasing returns (concept long run since variable factor) e) none of the above MC of first unit: 200 (TC - TFC = 400 - 200 = MC) MC of second unit: 220 (620 - 400) Answer: a) already facing diminishing returns Note: c) and d) are immediately wrong, since both pertain to long run when there is no fixed factor Should Firm Stay in Business? Is firm earning a pr
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