Microeconomics · free preview
Costs in the Short and Long Run
Every plant size draws its own U-shaped short-run cost curve, and the long-run curve is the envelope of them all, the cost frontier of a firm that can rebuild everything.
1. Two meanings of time
Two meanings of time
2. The envelope
The envelope
3. Choosing a plant is choosing a curve
Choosing a plant is choosing a curve
4. Why flexibility is not free
Why flexibility is not free
5. The envelope construction
Each plant size generates a U-shaped short-run average total cost curve. How is the long-run average total cost curve constructed from them?
6. Stuck in the short run
A firm built a large factory expecting demand of 500 units a day, but demand settled at 150. Which statement describes its situation?
7. The cost gap
A firm's current short-run average total cost at its output of 150 units is 9 dollars per unit, while the long-run envelope at 150 units sits at 6 dollars per unit. Compute the gap between them in dollars per unit and write the number.
8. The envelope explained
Each plant size yields a U-shaped short-run average total cost curve. How is the long-run average total cost curve built from them?
9. The oversized factory
A firm built a huge factory for expected demand of 500 units a day, but demand settled at 150. What does cost theory predict?
10. The cost of being stuck
A firm's short-run average total cost at its output of 200 units is 12 dollars per unit, while the best plant would achieve 8 dollars per unit. Compute the total daily savings from re-sizing in dollars, and write the number.
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