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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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