Question

In: Economics

Question 2 When a firm’s production function exhibits constant returns to scale: the short-run average cost...

Question 2

  1. When a firm’s production function exhibits constant returns to scale:

    the short-run average cost curve will be horizontal.

    the long-run average cost curve will be U-shaped.

    the long-run marginal cost curve will be upward sloping.

    the short-run average variable cost curve will be downward sloping.

    the long-run average cost curve will be horizontal.

Solutions

Expert Solution

There are two types of production functions. They are variable proportion and returns to scale. The variable proportion applies to shortrun and the returns to scale are applicable to the longrun. Under variable proportion, units of fixed factors remain constant and units of variable factors are changing. But under returns to scale all factors are changing. Increasing returns, diminishing returns and negative returns are associated with variable proportion. But increasing returns, constant returns and decreasing returns are associated with the returns to scale.

When a firm is experiencing increasing returns to scale the average cost fall as output increases. Then the average cost curve will be downward sloping. If the production function exhibits constant returns to scale, the average cost will be the same for all output level. Thus the average cost curve will be a horizontal. Again when there is decreasing returns to scale the average cost will be increasing with increasing output level. All these returns together gives the shape of an envelope to the longrun average cost curve.

Answer: the longrun average cost curve will be horizontal.


Related Solutions

Classical theory assumes the economy’s production function exhibits constant returns to scale. An example is the...
Classical theory assumes the economy’s production function exhibits constant returns to scale. An example is the Cobb-Douglas production function presented on pp. 61-62: Y = AKαL1-α MPL = (1 – α)Y/L MPK = αY/K A is greater than zero and measures the productivity of the available technology. The parameter α is a constant between 0 and 1 and measures capital’s share of income. Assume A = 1, α = 0.5, L = 64 and K = 4. Find the values...
Explain the relationship between a firm’s short-run production function and its short-run cost function. Focus on...
Explain the relationship between a firm’s short-run production function and its short-run cost function. Focus on the marginal product of an input and the marginal cost of production. (p. 283 #3
4. (a) If a production function exhibits increasing returns to scale and the quantity of all...
4. (a) If a production function exhibits increasing returns to scale and the quantity of all inputs is doubled, what happens to output? (b) If a production function exhibits increasing returns to scale and the scale of output is doubled, what happens to the average cost per unit produced
Assume diminishing marginal product, constant returns to scale and perfect competition. Draw short-run marginal cost, average...
Assume diminishing marginal product, constant returns to scale and perfect competition. Draw short-run marginal cost, average total cost and average variable cost curves for the firm. Identify market prices that induce entry, exit and shutdown on this graph. Draw the short-run supply curve for the market. Describe the relationship between the short-run supply curve for the market and the firm’s cost curves. Draw the long-run supply curve.
1) Which of the following production functions exhibits constant returns to scale? A) q = KL...
1) Which of the following production functions exhibits constant returns to scale? A) q = KL B) q = KL0.5 C) q = K + L D) q = log(KL) 2) Why do firms tend to experience decreasing returns to scale at high levels of output? A) Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output. B) Government tax policy tends to discourage large-scale production operations. C) Firms face fewer...
Q- A firm’s short-run cost function for the production of gizmos is given by the following...
Q- A firm’s short-run cost function for the production of gizmos is given by the following expression: C(y) = 10y2 + 200y + 100 000. Draw the cost function C(y) and calculate; A- Calculate the range of output over which it would be profitable for this firm to produce gizmos if it can sell each gizmo for $2400. Calculate the value of the output that maximizes this profit. Calculate the value of maximum profit B- Repeat these calculations and explain...
Which production function illustrates the case of constant returns to scale?
 A xY = F (zK, zL) where x <z  B  zY = F (zK, zL)  C  yY =F (zK, zL) where y>z  Which production function illustrates the case of constant returns to scale?  Which production function illustrates the case of decreasing returns to scale?  Which production function illustrates the case of increasing returns to scale?    The costs of expected inflation include (choose one or more)  A  shoeleather cost  B  menu costs  C  variability in relative prices leading to microeconomic inefficiencies in the...
2. Consider the Solow growth model. Suppose that the production function is constant returns to scale...
2. Consider the Solow growth model. Suppose that the production function is constant returns to scale and it is explicitly given by: Y = KaL1-a a. What is the level of output per capita, y, where y = Y/L? b. Individuals in this economy save s fraction of their income. If there is population growth, denoted by n, and capital depreciates at the rate of d over time, write down an equation for the evolution of capital per capita, k,...
Explain the relationship between a firm’s short-run production function and its shortrun cost function. Focus on...
Explain the relationship between a firm’s short-run production function and its shortrun cost function. Focus on the marginal product of an input and the marginal cost of production. b) A U.S. electronics firm is considering moving its production to a plant in Mexico. Its estimated production function is q=L 0.5 K 0. 5 . The U.S. factor prices are In Mexico, the wage is half that in the United States, but the firm faces the same cost of capital: ?...
assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale...
assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale (DRS). (10 pts) Draw an isoquant-isocost graph for two levels of output (q1=10 and q2=20) for this firm. Denote your cost-minimizing choices of capital and labor as (L1*, K1*) for output q1 and (L2*, K2*) for output q2. Use TC1 and TC2 to denote the total cost of each respective output level. (5 pts) How does your graph illustrate DRS? Explain. (5 pts) Using...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT