Question

1. What is the difference between the short run and the long run for the profit-maximizing firm?

2. The number of repairs produced by a computer retail shop depends on the number of workers as follows:

Number of Workers	Number of Repair	Marginal Product (what each additional worker adds to the total production)	Average Product (the number of units per worker)
0	0	-
1	8
2	20
3	35
4	45
5	52
6	57
7	60

a. For what range of labor input are there increasing returns to labor (where each additional worker adds more to production than the previous one)?

b. For what range of labor input is marginal product greater than average product? What is happening to average product as employment increases over this range?

c. For what range of labor input is marginal product smaller than average product? What is happening to average product as employment increases over this range?

Please try to give more detailed answers. The more the better. Would really appreciate your help. Thank you in advance.

Answer 1

1. Short run is the period of time during which production can be increased only by increasing variable factors. Fixed factor like plant and machinery remains constant. The producer can control only the variable costs not the fixed cost. Accordingly, the producer must cover at least variable costs of production during the short period.

Long period is he period of time during which production can be increased by way of additional application of all the factors of production. The producer must cover all costs of production. In fact all costs are of the nature of variable costs in the long run because no factor is a fixed factor in the long run. All costs are under the control of the producer, and therefore must be covered.

2.

a) From 1 - 3 units of labor

b) For 2 and 3 units of labor, MP > AP.

AP falls as employment increases.

c) From 4 to 6 units of labor, MP < AP.

AP > MP over 6 units of labor.