A. 1. Explain the difference between the short run and the long run as it relates...

A. 1. Explain the difference between the short run and the long run as it relates to a firm’s production function. 2. Why is this distinction important to a firm’s manager? Explain. B. Short-run decisions are frequently referred to as “constrained” decisions, while long-run decisions are frequently referred to as “planning” decisions. Why is this the case? Explain.

Expert Solution

a. The production function gives the relationship between the quantity of factors of production which are used as inputs by a firm and the amount of output. The short run is the period of time during which atleast one of the factors of production is fixed.In short run production function we assume that we assume the quantity of plant and machinery to be fixed and that we can change the amount of output only by changing the variable inputs such as raw materials, labour and energy. In the short run, the law of variable proportions states that as more units of a variable factor are added to fixed factor, a stage will come when the marginal product of the variable factor will start declining.

Long run is a period of time when there are no fixed factors of production. All factors are variable. Therefore the scale of production can be changed. The input mix between labour and capital can also be changed in the long run. The law of returns to scale gives the relationship between inputs and output in the long run. There can be increasing returns to scale, constant returns to scale and diminishing returns to scale.

b. In the short run, at least one of the factors of productionis fixed. So it can be used in fixed amount only. Threfore, the decision-making process of the manager is constrained by the amount of fixed input that is available. In contrast, in the long run, all of the factors of production are variable. Therefore, the manager has the freedom to decide the amount of each variable factor of production to be used. He can also plan the amount of factors that are fixed in the short run to be used. The manager in this case can plan for the production needs in the future.

Rahul Sunny answered 2 years ago

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