Question

1 The short-run average total cost curve and the long-run average total cost curve are similarly shaped. What are the causes for the short run and long-run average total cost curve to slope down and up?

2 Mr. Salim has been working at a car manufacturing plant forthe last 4 years. He recently lost his job due to the downsizing of the company he works for due topoor car sales and poor economic performance. What type of unemployment is Salim forced into? Justify your answer.

Answer 1

1.

Short run:

As fixed factors of a firm remain the same, the output changes due to the variable factors such as raw material, labor, etc

As the fixed cost gets distributed over the output as production is expanded, the average total cost in the short run goes downward sloping and reaches a minimum which is the optimal scale of operation. If a firm in the short-run increases its level of output with the same fixed plant; the economies of that scale of production change into diseconomies and thus average cost increases leading the curve to be sloping upward.

Long run:

The reason for the up and down is same in case of long run curve as well, except the fact that all costs are variable in this case, i.e. no fixed costs. Hence the curve is a bit flatter in comparison to Short run.

2.

Frictional unemployment. Usually this type of unemployment occurs when the workers are non-voluntarily laid off due to plant closure, etc like with the case of Mr. Salim.

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