Question

4. should a competitive firm ever produce when it is losing money? why or why not?

5.what is meant by the term '' least cost combination''? what is the implication of this combination of inputs to produce a given level of out

6. what causes the long run average cost curve to decline, become relatively flat, and then increase? explain

Answer 1

4.

A competitive firm should produe or remain in the market till it is covering its variable costs even if it is making losses. Graphically, it is the level of output when marginal cost interests the average variable cost at the minimum point on that curve, any output below that level of output will not be produced and firm will shut down and bear fixed losses.

5.

Least cost combination is given the production function assuming it satisfies diminishing factor returns, firms try to minimize the cost of production and compute factor prices which can produce the good at minimum costs associated with production.

If we are given a certain level of output Q₀ and factors of production are l for labour with wage rate w and k for capital with rental price r implies cost function will be wl+rk and production function f(l,k) satisfying diminishing returns;

using lagrange to minimize cost given production function as

will derive the level of labor and capital producing given level of output at least cost.

6.

the long run average cost curve decline because of economies of scale.i.e. when increase in output is greater than the increasein inputs, it becomes flat corresponds with constant returns to scale.i.e. when increase in output is at par with increase in proportion of inputs and later the long run average cost curve slops upwards as there are diseconomies of scale; when output increase by lesser proportion than increase in input.