Question

In: Economics

What is the long run average cost (LRAC) of a firm? How would you obtain the...

What is the long run average cost (LRAC) of a firm? How would you obtain the LRAC curve from the short run average cost (SRAC) curves? Illustrate your answer by using appropriate diagrams and underlying assumptions.

Solutions

Expert Solution

What is a long run average cost (LRAC) curve of a firm?

A long run Average cost (LRAC) curve of firms refers to a curve that shows the firms lowest cost per unit at each level of output while assuming that all factors of production are variables. That is no fixed cost involved.

The main difference between the short run Average cost and the long run Average cost Is that in the LRAC all costs are variable cost there are no fixed cost and therefore we cannot distinguish between the Total variable cost and Total cost in the long-run TC = VC.

How would you derive LRAC from the short run average cost (SRAC) curves?

To derive the LRAC from the SRAC curve, we take the lowest average total cost curve at each level of output. From the graph, The points named a,b,c are the lowest average total cost at each level adding up to the formation of the LRAC curve.

The lowest points can be of different plant size as demonstrated on graph 2.

From the graph

At output level 10 point A , the lowest point is at price $7 while at output level 20 point B, the price is 5.5 and at the output level 30, point C the price is 5 and so on to form the long-run average cost curve.


Related Solutions

5)What is the long run average cost (LRAC) of a firm? How would you obtain the...
5)What is the long run average cost (LRAC) of a firm? How would you obtain the LRAC curve from the short run average cost (SRAC) curves? Illustrate your answer by using appropriate diagrams and underlying assumptions. 6. What are the types of price discrimination a monopolist can practice? What conditions must hold for price discrimination to be successful? 10. Explain and diagrammatically represent the concept of “Excess capacity “ in monopolistic competition.
How can the long-run average cost (LRAC) curve be derived from the short-run average total cost...
How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve?
How can the long-run average cost (LRAC) curve be derived from the short-run average total cost...
How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve? Describe economies of scale and diseconomies of scale. What are the determinants of economies of scale and diseconomies of scale, respectively? Using a real-world company (other than Sysco), explain the causes of economies of scale for your company. How would economies of scale help your company compete in its industry?
3-2 Please provide details and examples How can the long-run average cost (LRAC) curve be derived...
3-2 Please provide details and examples How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve? Describe economies of scale and diseconomies of scale. What are the determinants of economies of scale and diseconomies of scale, respectively? Using a real-world company (other than Sysco), explain the causes of economies of scale for your company. How would economies of scale help your company compete in its industry?
Describe how the long run average cost curve is an envelope of short run average cost...
Describe how the long run average cost curve is an envelope of short run average cost curves.
Discuss the long-run average cost curve of a firm and how it represent returns to scale....
Discuss the long-run average cost curve of a firm and how it represent returns to scale. Substantiate your answer with the aid of a diagram
2. How does the envelope relationship relate short run average cost and long run average cost?
2. How does the envelope relationship relate short run average cost and long run average cost?
A. In the long-run, a firm’s costs of production are shown by the long-run average cost...
A. In the long-run, a firm’s costs of production are shown by the long-run average cost curve. (12) (1) What forces explain the typical shape of the long-run average cost curve? (6) (2) How is the shape of the long-run average cost curve related to what the firms in an industry will look like? Will there be lots of firms or just a few, or perhaps even just one? Will all the firms be about the same size or will...
Draw a long run average cost curve, as well as several short run average cost curves...
Draw a long run average cost curve, as well as several short run average cost curves if the firm has increasing economies of scale followed by decreasing economies of scale.
What is the long-run average cost curve? What are the three ranges of output and in...
What is the long-run average cost curve? What are the three ranges of output and in what order do they occur?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT