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ECO100 - OCT 24

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James Pesando

REVIEW: ● Production Function ○ Short Run: Variable factor (labour), fixed factor (capital) ● Law of Diminishing Returns ○ In short run, marginal product of variable factor eventually declines ■ General motors, assembly plant ● MP and MC ○ MP increasing => MC decreasing (additional unit) ○ MP must fall (eventually) => MC must rise (eventually) Non tutorial assignments, ● 3. A firm is producing 500 units of output daily. Its marginal cost at this output is 8.00; its average total cost is 7.5 ; its average variable cost is 4.00. What is the firm’s daily total fixed cost? ○ TFC = TC - TVC ○ TC = ATV * Q = 7.50 * 500 = 3750 ○ TVC = AVC *Q = 4.00 * 500 = 2000 ○ 3750 - 2000 = 1750 a) 7.5 b) 750 c)1750 d)3750 e)4750 Long Run average total cost 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. ○ Law of Diminishing Returns does not apply ○ MP does not necessarily fall after some point => MC does not necessarily rise ● Suppose firm doubles all inputs ○ Output doubles (constant returns to scale) => ATC in unchanged [Only one on test] ○ Output less than doubles (diseconomies of scale) => ATC increases ○ Output more than doubles (economies of scale) => ATC falls 4. Long-Run Average Total Cost Curve ○ Constant Returns to Scale ○ Diseconomies of Scales ○ Economies of Scale ● 1. Labour, capital both vary -> Law of Diminishing returns does not apply ● 2. In the long run, there are no fixed costs (# of assembly plans can vary) ● 3. The curve shows lowest ATC for producing each level of output (“efficient production”) ● 4. Firm’s LRATC may at firm exhibit economies of scale and, later, diseconomies of scale (See text, figure 13.7) ● 5. Opportunity Cost and the Measurement of Economic Profit Should firm stay
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