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Econ11Fall2007NotesForLecture_15Oct29

Econ11Fall2007NotesForLecture_15Oct29 - Lecture XV Long Run...

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Lecture XV Oct 29, 2007, Long Run Cost Curves I. Relation Between Long and Short-Run Cost Curves II. Choosing Output to Maximize Profit in the Long Run III. Supply Response of a Firm in Long-Run Equilibrium I. Relation Between Long and Short-Run Cost Curves A. In the long run, all inputs are fully variable - choose the combination of L & K that minimizes cost. (TFC = 0) $ TC L TC L =TC S AC L =AC S =MC L =MC S TC S Q ACLmin $/Q MC S AC S AC L AVC MC L B. Special short run total cost curve drawn for plant size
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that minimizes long run average cost. 1. When TC S = TC L ; AC S = AC L = MC S = MC L 2. "Bottom of the bird's nest" on the average-marginal diagram where AC S = AC L = MC S = MC L B. "Economies of scale" what happens to output and average cost if all inputs change by the same percentage. 1. Increasing returns to scale - AC falling 2. Constant returns to scale - AC flat 3. Decreasing returns to scale - AC rising II. Choosing Output to Maximize Profit in the Long-Run on a Total Revenue - Total Cost Diagram A. Long run total cost curves - all costs variable
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