The behaviour of long run cost depends on the firms

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Unformatted text preview: uses the economically efficient quantities of labour and capital. The behaviour of long-run cost depends on the firm’s production function. The production function is the relationship between the maximum output attainable and the quantities of both labour and capital. The Production Function The Output (pizza per day) 1 Oven 2 Oven 3 Oven 4 Oven Labour 1 2 3 4 5 Marginal product of labour decreasing 4 10 13 15 16 10 15 18 20 21 13 18 22 24 25 15 21 24 26 27 Marginal product of capital decreasing Average Costs per Pizza Average Pizzas 4 10 13 15 16 20 25 1 oven $12.50 $7.50 $7.69 $8.33 $9.38 ----- 2 ovens $15.00 $7.50 $6.92 $6.67 $6.77 $7.50 --- 3 ovens $20.67 $9.42 $7.69 $7.33 $7.19 $6.88 $8.00 4 ovens $26.67 $11.67 $9.36 $8.33 $8.07 $7.29 $7.50 Short-Run Costs of Four Different Plants Different 12.00 ATC1 10.00 9.36 ATC2 ATC3 ATC4 8.00 7.69 6.92 6.00 0 5 10 13 15 20 25 30 Long-Run Average Cost Long-Run Curve Curve 12.00 12.00 ATC1 10.00 ATC2 ATC3 ATC4 8.00 6.00 0 Least-cost plant is 1 LRAC curve Least-cost plant is 2 5 10 15 Least-cost plant is 3 18 20 Least-cost plant is 4 2425 30 Returns to Scale Returns Returns to scale are the increases in output that result from increasing all inpu...
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