Question

1. Consider the long-run production of shirts. The cost of the indivisible inputs used in the production of shirts is $500 per day. To produce one shirt per day, the firm must also spend a total of $4 on other inputs-labor, materials, and other capital. For each additional shirt, the firm incurs the same additional cost of $4.

1. Compute the average cost for 20 shirts, 50 shirts, 100 shirts, and 500 shirts.

Draw the long-run average cost curve for 20 to 500 shirts per day

Answer 1

Answer : a) Here $500 is the fixed cost and $4 is the cost for every shirt production.

Total variable cost = Per shirt production cost * Quantity

For 20 shirts :

Total variable cost = 4 * 20 = $80

Total cost = Total variable cost + Total fixed cost

=> Total cost = 80 + 500 = $580

Average cost = Total cost / Quantity

=> Average cost = 580 / 20

=> Average cost = $29.

For 50 shirts :

Total variable cost = 4 * 50 = $200

Total cost = 200 + 500 = $700

Average cost = Total cost / Quantity

=> Average cost = 700 / 50

=> Average cost = $14.

For 100 shirts :

Total variable cost = 4 * 100 = $400

Total cost = 400 + 500 = $900

Average cost = Total cost / Quantity

=> Average cost = 900 / 100

=> Average cost = $9.

For 500 shirts :

Total variable cost = 4 * 500 = $2000 [Here quantity = 500]

Total cost = 2000 + 500 = $2500 [Here fixed cost = $500]

Average cost = Total cost / Quantity

=> Average cost = 2500 / 500

=> Average cost = $5.

In the following picture the long run average cost curve is shown. In the diagram of following picture LAC is the long run average cost curve for per day 20 to 500 shirts.