Question

a. Production & Cost Relationship in the Long-Run

Explain the long-run production concept of diminishing returns to scale, and what it implies about the long-run average costs of production.

b.

Quantity of Umbrellas	Total Cost	MC
0	8	na
1	10	2
2	13	3
3	17	4
4	22	5
5	28	6
6	35	7

(4 pts) Comment on the shape of the short-run total production curve that gives the input and output relationship in the short-run. Sketch and explain the shape. Your answer should be specific to the information given in the table above.

     

Answer 1

1. long run production concept is related with input and production of output. there are three phase where production based on the input elements. 1. increasing return to scale 2. decreasing return to scale and 3. constant return to scale. as we know production need input to produce output so decreasing/ diminishing return to scale infers that when we increase the scale of inputs like both labor and capital which are variable in long run, produce the output which is less than the proportion with increase in input. it means that less production takes place than the input used in production process reason for the same is that capital and labor both are increased to increase the production but diseconomies of scale on account of managerial level, administrative crunches etc affect the same. as these factors affect variable cost of production and increases continuously and produces less output due to return average variable cost and average fixed cost after a certain point increase continuously and results in less in production and increases in long run cost of production.

2.

in the short run both input and output are put in certain proportion, input like labor are variable and fixed factor like capital are constant, when we put the variable factor along with fixed factor of production then output increases. it also increase the cost of variable factor which is denoted by Marginal cost shown in the graph. when we combine both the fixed and variable cost then total cost increase along with increase in output of umbrellas. so total cost also rise.