To all you economists out there...

[COntr]

Hi can anyone help me with these questions? My professor did not explain the answer well enough and I was hoping someone here could help.

1. True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

2. Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Thanks

 

[Slew Foot]

Im not an economist but..

1. False, the firm should produe at a rate where long term PROFIT is maximized. Say computers for example, the same thing you produce today well sell for 50% less in a year. So assuming the cost to produce in that year doesnt decrease by 50%, youre better off producing a bunch now while the price is higher.

2. not sure

 

[3chordcharlie]

Originally posted by: COntr
Hi can anyone help me with these questions? My professor did not explain the answer well enough and I was hoping someone here could help.

1. True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

2. Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Thanks

Is this econ 101, giving you the assumption of competitve (edit) profit-maximizing (/edit)firms?

If so, the answer to 1 is 'false' and the reason is that a firm should produce until marginal cost = price. With a normal set of first-year assumptions, this will be at an upward sloping part of the average cost curve.

The answer to 2. depends on how you consider long and short run. All short-run supply curves are upward sloping (at least at the basic econ level). Think of this as the cost of hiring OT labour, or having your parts rushed to you by fedex instead of delivered next week by USPS (however you want to think of it). But in the long run, you could build another factory, or hire new staff, so your long-run supply curve may be flat.

 

[BigJ]

1. False. You want to maximize profits while minimizing costs. You do not minimize costs at the expense of declining profits.

2. See 3cordcharlie

Is this for an Industrial Organization class?

 

[COntr]

This is a basic level economics class.

Thanks for the replies, #2 still isn't clicking in my brain, but the explanation above was better than my professors.

So if anyone could maybe rephrase #2 or give more examples, that would be great.

Thanks again

 

[COntr]

Any more? Anything at all will help.

 

[JS80]

Originally posted by: 3chordcharlie

Originally posted by: COntr
Hi can anyone help me with these questions? My professor did not explain the answer well enough and I was hoping someone here could help.

1. True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

2. Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Thanks

Is this econ 101, giving you the assumption of competitve (edit) profit-maximizing (/edit)firms?

If so, the answer to 1 is 'false' and the reason is that a firm should produce until marginal cost = price. With a normal set of first-year assumptions, this will be at an upward sloping part of the average cost curve.

The answer to 2. depends on how you consider long and short run. All short-run supply curves are upward sloping (at least at the basic econ level). Think of this as the cost of hiring OT labour, or having your parts rushed to you by fedex instead of delivered next week by USPS (however you want to think of it). But in the long run, you could build another factory, or hire new staff, so your long-run supply curve may be flat.

supply curve has nothing to do with a producers cost. it is merely stating that the higher the market price of the good, the more quantity will be supplied.

 

[BigJ]

From a site I found:

True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

False. In the long run, under perfect competition, firms should produce where average costs are minimized. The long-run average cost curve is formed by determining the minimum cost at every level of output. In the short run, however, the firm might not be producing the optimal long-run output. Thus, if there are any fixed factors of production, the firm does not always produce where long-run average cost is minimized.

Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Constant returns to scale imply that proportional increases in all inputs yield the same proportional increase in output. Proportional increases in inputs can induce higher prices if the supply curves for these inputs are upward sloping. Therefore, constant returns to scale does not always imply long-run horizontal supply curves.

 

[3chordcharlie]

Originally posted by: BigJ
From a site I found:

True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

False. In the long run, under perfect competition, firms should produce where average costs are minimized. The long-run average cost curve is formed by determining the minimum cost at every level of output. In the short run, however, the firm might not be producing the optimal long-run output. Thus, if there are any fixed factors of production, the firm does not always produce where long-run average cost is minimized.

Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Constant returns to scale imply that proportional increases in all inputs yield the same proportional increase in output. Proportional increases in inputs can induce higher prices if the supply curves for these inputs are upward sloping. Therefore, constant returns to scale does not always imply long-run horizontal supply curves.

Good answers. The long-run short-run thing always caused me a *little* confusion, for example because in the first question you're assuming that any level of output can be acheived with minimum average cost (by an industry, if not a firm), and in the second case you make no such assumption.

 

[halik]

1) false Depending on the market structure, firms will maximize where MC=MR or P=MC

2) can't remember long run micro, that was 5years/many beers ago...

<- BS Economics

edit: I'd have to say true on the second. I don't see why constants returns to scale wouldn't exist in an industry with upward sloping supply. If anything it would make the supply curve linear as opposed to exponential for diminishing returns to scale.

Or better yet with constant returns to scale, extra 1 Widget would always cost 1 P, so the supply curve would look like /. For something with diminishing returns extra 1 Widget would cost 1P and then one more Widget would cost 1.5 P and so on. The supply curve would would have an increasing slope.

 

[ElFenix]

<keynes> in the long run, we're all dead </keynes>

 

[3chordcharlie]

Originally posted by: halik
1) false Depending on the market structure, firms will maximize where MC=MR or P=MC

2) can't remember long run micro, that was 5years/many beers ago...

<- BS Economics

edit: I'd have to say true on the second. I don't see why constants returns to scale wouldn't exist in an industry with upward sloping supply. If anything it would make the supply curve linear as opposed to exponential for diminishing returns to scale.

Or better yet with constant returns to scale, extra 1 Widget would always cost 1 P, so the supply curve would look like /. For something with diminishing returns extra 1 Widget would cost 1P and then one more Widget would cost 1.5 P and so on. The supply curve would would have an increasing slope.

I'm pretty sure the other answer (upward sloping input-supply curves) is right. CRTS doesn't imply constant returns to money inputs, which is what my original answer incorrectly provided.