PSLecture15 - Problem Set for Lecture 15: Large Scale...

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Problem Set for Lecture 15: Large Scale Oligopolists: Good or Bad? [January 26, 2010] Note: Those problems identified with a T are definitely considered for review in the tutorials. T15.1 “Regan observes that the long run production period is a planning period in which the entrepreneur can build any plant size desired. Both capital [plant and machinery] and labour are variable inputs in the long run. Regan states that in the long run production period, the number of firms in a perfectly competitive industry could increase [i.e., firms could enter the industry] or decrease i.e., firms could leave the industry. Regan remembers that in the short run production period, the number of firms can not change since capital is a fixed input. Regan concludes that the short run and the long run are significantly different production periods.” T15.2 “Ricky talks about the u-shaped average total cost curve in the long run. Ricky understands that this curve is a planning curve and shows the lowest possible unit cost for producing a specific output. Ricky also understands that there is an average total cost curve in the short run tangent to each point on the long run u-shaped average total cost curve. Thus, Ricky argues that, when the optimal output is determined, a short run plant size would be also determined by the entrepreneur.” T15.3 “Riley understands that when the u-shaped long run average total cost curve for the firm is downward sloping, increasing returns to scale would be achieved [i.e., % increase in output is greater than percentage increase in all inputs, taken together]. Riley remembers the economic analysis of Solow and Denison [Lecture 6] in which increasing returns to scale was one of the sources of economic growth . Now Riley has a greater understanding of the phenomenon of increasing returns to scale. Riley suggests that as the industrial sector grows, many firms would increase their optimal plant sizes and would thus through specialization of both labour and capital be able to produce higher quantities of output at lower unit costs. Riley concludes that these firms would experience increasing returns to scale.” T15.4 “Riordan is interested in the conditions under which long run equilibrium is established in a perfectly competitive industry – an industry in which there are numerous firms and in which all firms have the identical cost curves and produce the same output. Riordan reasons that in order to
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This note was uploaded on 12/22/2010 for the course ECO ECO105 taught by Professor Hare during the Spring '08 term at University of Toronto- Toronto.

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PSLecture15 - Problem Set for Lecture 15: Large Scale...

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