# ch8 - EC120 Chapter 8 – Producers in the long-run page 1...

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Chapter 8 – Producers in the long-run Long-run cost curves LRAC curve ( Fig 8-3 )… …is the envelope of the SRATC curves …does not necessarily contain the minimum points of every SRATC. …shifts if input prices or technology changes Minimum Efficient Scale (MES) : Lowest Q that minimizes LRAC. Principle of substitution: Pick labour (capital) intensive method if labour (capital) is relatively cheap Economies of scale (decreasing LRAC)… …is implied by increasing returns to scale (if all inputs double then output more than doubles) …is caused by …the spreading of fixed costs Constant costs (constant LRAC) …is implied by constant returns to scale (if all inputs double then output doubles). Diseconomies of scale (increasing LRAC) …is implied by decreasing returns to scale (if all inputs double then output less than doubles) …is caused by

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Unformatted text preview: EC120 Chapter 8 – Producers in the long-run page 1 of 3 Exercise 8.1: Production functions, returns to scale and economies of scale In each of the cases below indicate whether the… (i) production function exhibits constant , increasing or decreasing returns to scale (ii) corresponding long-run cost function exhibits decreasing, constant or increasing LRAC . a) Q = 10K + 5L K L Q Reasoning : b) Each unit of output requires 4 L units & 6 K units. K L Q Reasoning : c) Q = KL K L Q Reasoning : EC120 Chapter 8 – Producers in the long-run page 2 of 3 Exercise 8.2 : Short-run and Long-run average cost curves Suppose there are only two possible plant sizes: A and B. Cost functions for these plants are given by TC A = 1,000,000 + 3Q TC B = 500,000 + 4Q a) Draw the SRATC curve for each plant. b) Find the LRAC curve. EC120 Chapter 8 – Producers in the long-run page 3 of 3...
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ch8 - EC120 Chapter 8 – Producers in the long-run page 1...

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