Question

Chapter 11

5) In the long run, all costs are variable costs. Why?

6) What is the long-run average cost curve? What are the three ranges of output and in what order do they occur? Briefly define each of the three ranges.

7) What are economies of scale? What is the main source of economies of scale?

8) What are the diseconomies of scale and why might they occur?

Answer 1

Ans) 1) Long run is a time when all the costs become variable. It is because in long run, the fixed costs vanish due to spreading over large output. In long run, the contracts, leases etc also expire so the firm becomes flexible in its activities.

2) Long run average cost curve shows the cost of a firm in long run when all the costs become variable. That is, it shows per unit cost of production in long run when firm increases its operations.

It has three ranges ÷ economies of scale, constant returns to scale and Diseconomies of scale.

In economies of scale, per unit cost of production decreases with increase in output. It happens because the costs get spread over large units of production..

Constant returns to scale is when there is proportional increase in per unit cost with increase in input.

Diseconomies of scale is when long run average total cost increases with increase in output. This might occur due to lack of coordination.

3) Economies of scale is when there is decrease in per unit cost with increase in production. It happens because the the costs get spread over larger output.

One of the main reason for economies of scale is specialisation of labour and machinery.

4) Diseconomies of scale happens when the per unit cost increases with increase in output. It happens due to lack of coordination among workers and lack of management of workers by the firms.