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Chapter 7: Difference between long run and short run. (page 237)
What is the short run in the microeconomic theory?
The short-run is the period where at least 1 factor of production is fixed and cannot be changed.
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A chair manufacturer hires its assembly-line labor for \(30 an hour and calculates that the rental cost of its machinery is \)15 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 3 hours of labor for each hour of machine time, is it minimizing its costs of production? If so, why? If not, how can it improve the situation? Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the optimal combination of labor and capital.
The short-run cost function of a company is given by the equation TC = 200 + 55q, where TC is the total cost and q is the total quantity of output, both measured in thousands.
What is the company's fixed cost?
If the company produced 100,000 units of goods, what would be its average variable cost?
What would be its marginal cost of production?
What would be its average fixed cost?
Suppose the company borrows money and expands its factory. Its fixed cost rises by \(50,000, but its variable cost falls to \)45,000 per 1000 units. The cost of interest (i) also enters into the equation. Each 1-point increase in the interest rate raises costs by $3000. Write the new cost equation.
You manage a plant that mass-produces engines by teams of workers using assembly machines. The technology is summarized by the production function q = 5KL where q is the number of engines per week, K is the number of assembly machines, and L is the number of labor teams. Each assembly machine rents for r = \(10,000 per week, and each team costs w = \)5000 per week. Engine costs are given by the cost of labor teams and machines, plus $2000 per engine for raw materials. Your plant has a fixed installation of 5 assembly machines as part of its design.
What is the cost function for your plant鈥攏amely, how much would it cost to produce q engines? What are average and marginal costs for producing q engines? How do average costs vary with output?
How many teams are required to produce 250 engines? What is the average cost per engine?
You are asked to make recommendations for the design of a new production facility. What capital/ labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing at any level of output q?
A recent issue of Business Week reported the following: During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers. That鈥檚 because closing and reopening plants is expensive, partly because the auto makers鈥� current union contracts obligate them to pay many workers even if they鈥檙e not working. When the article discusses selling cars 鈥渁t a loss,鈥� is it referring to accounting profit or economic profit? How will the two differ in this case? Explain briefly.
Suppose the economy takes a downturn, and that labor costs fall by 50 percent and are expected to stay at that level for a long time. Show graphically how this change in the relative price of labor and capital affects the firm鈥檚 expansion path.
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