Chapter 7: Long Run Cost Compared with Short Run Costs
Supplemental Instruction
Iowa State University / Leader: / Veronica
Course: / Econ 101
Instructor: / Kreider
Date: / 10-28-14
(1) Output (per Day) / (2) Capital / (3) Labor / (4) TFC / (5) TVC / (6) TC / (7) MC / (8) AFC / (9) AVC / (10) ATC
0 / 1 / 0 / $ 150 / $ 0 / $ 150 / — / — / —
$ 10/3
30 / 1 / 1 / $ 150 / $ 100 / $ 250 / $ 5 / $ 10/3 / $25/3
$ 10/7
70 / 1 / 2 / $ 150 / $ 200 / $ 350 / $ 15/7 / $ 20/7 / $5
$ 5/6
120 / 1 / 3 / $ 150 / $ 300 / $ 450 / $ 5/4 / $ 10/4 / $ 45/12
$ 5/8
160 / 1 / 4 / $ 150 / $ 400 / $ 550 / $ 15/16 / $ 10/4 / $ 55/16
$ 10/19
190 / 1 / 5 / $ 150 / $ 500 / $ 650 / $ 15/19 / $ 50/19 / $ 65/19
$ 10/21
210 / 1 / 6 / $ 150 / $ 600 / $ 750 / $ 15/21 / $ 60/21 / $ 75/21

Table 1: Clean ‘n’ Shine Output

  1. Over what range of output does Clean ‘n’ Shine experience increasing marginal returns to labor?
  1. Over what range does it experience diminishing marginal returns to labor?
  1. As output increases, how does average fixed costs behave?
  1. As output increases, how does marginal cost, average variable cost, and average total cost behave?
  1. Looking at the numbers in the table, but without drawing any curves, what is the relationship between MC and AVC? What about the relationship between MC and ATC?
  1. Fill in Chart:

Term / Symbol and/or Formula / Definition
Long-run total cost
Long-run average total cost
  1. Define:
  2. Diseconomies of Scale:
  3. Constant Returns to Scale:
  4. Minimum efficient Scale:
  1. The following table gives the short-run and long-run total costs for various levels of output of Consolidated National Acme, Inc.:

Q / TC1 / TC2
0 / 0 / 350
1 / 300 / 400
2 / 400 / 435
3 / 465 / 465
4 / 495 / 505
5 / 540 / 560
6 / 600 / 635
7 / 700 / 735
  1. Which column, TC1 or TC2, gives long-run total cost, and which gives short-run total cost? How do you know?
  1. For each level of output, find short-run TFC, TVC, AFC, AVC, and MC.
  1. At what output level would the firm’s short-run and long-run input combinations be the same?
  1. Starting from producing two units, Consolidated’s managers decide to double their production to four units. So they simply double all of their inputs in the long run. Comment on their managerial skills.
  1. Over what range of output do you see economies of scale? Diseconomies of scale? Constant returns to scale?

5. “If a firm has diminishing returns to labor over some range of output, it cannot have economies of scale over that range.” True or false? Explain briefly.

  1. Fill in the Blank:
  2. In the long run, there are no ______; all inputs and all costs are ______
  3. The ______of producing a given level of output can be less than or equal to, but not greater than, the short-run total cost
  4. The long-run average cost of producing a given level of output can be less than or equal to, but not greater than, the ______
  5. A firm’s LRATC curve combines portions of each ATC curve available to the firm in the long run. For each output level, the firm will always choose to operate on the ATC curve with the ______
  6. in the short run, a firm can only move along its ______. In the long run, however, it can move from ______by varying the size of its plant. As it does so, it will also be moving along its LRATC curve.
  7. When long-run total cost rises proportionately less than output, production is characterized by ______, and the LRATC curve slopes ______.
  8. when long-run total cost rises more than in proportion to output, there are ______, and the LRATC curve slopes ______.