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Chapter 7: Long-Run (page 237)
What is the long-run in the microeconomic theory?
The long-run is the period where no factors of production are fixed and where all factors of production can 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.
a. Fill in the blanks in the table below.
| Units of Output | Fixed Cost | Variable Cost | Total Cost | Marginal Cost | Average Fixed Cost | Average Variable Cost | Average Total Cost |
| 0 | 100 | ||||||
| 1 | 125 | ||||||
| 2 | 145 | ||||||
| 3 | 157 | ||||||
| 4 | 177 | ||||||
| 5 | 202 | ||||||
| 6 | 236 | ||||||
| 7 | 270 | ||||||
| 8 | 326 | ||||||
| 9 | 398 | ||||||
| 10 | 490 |
b. Draw a graph that shows marginal cost, average variable cost, and average total cost, with cost on the vertical axis and quantity on the horizontal axis.
Suppose that a paving company produces paved parking spaces (q) using a fixed quantity of land (T) and variable quantities of cement (C) and labor (L). The firm is currently paving 1000 parking spaces. The firm鈥檚 cost of cement is \(4,000 per acre covered, and its cost of labor is \)12/hour. For the quantities of C and L that the firm has chosen, MPC = 50 and MPL = 4.
Is this firm minimizing its cost of producing parking spaces? How do you know?
If the firm is not cost-minimizing, how must it alter its choices of C and L in order to decrease cost?
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.
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