CAS EC 201 Study Guide - Midterm Guide: Marginal Cost, Average Variable Cost
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14 Nov 2016
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In the long run, there are no fixed costs. There may still be quasi-fixed factors in the long run. It is always possible to produce 0 units of output at a 0 cost and go out of business. The firm must be able to do at least as well by adjusting plant size as by having it fixed. The optimal choice of plant size is k* at y*. At y*, the long-run costs and the short-run costs are the same. (cid:4666)(cid:4667) (cid:4666) , (cid:4667) (cid:4666)(cid:4667) (cid:4666) , (cid:4667) The short-run average cost curve always lies above the long-run average cost curve and that they tangent at the point y*. In any level of output y, we just choose the plant size that gives us the minimum cost of producing that output level. Thus the long-run average cost curve will be the lower envelope of the short-run average costs.
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