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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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Joe quits his computer programming job, where he was earning a salary of \(50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for \)24,000 per year. In his first year of business he has the following expenses: salary paid to himself, \(40,000; rent, \)0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe鈥檚 computer software business.
Suppose the long-run total cost function for an industry is given by the cubic equation TC = a + bq + cq2 + dq3. Show (using calculus) that this total cost function is consistent with a U-shaped average cost curve for at least some values of a, b, c, and d.
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.
A computer company鈥檚 cost function, which relates its average cost of production AC to its cumulative output in thousands of computers Q and its plant size in terms of thousands of computers produced per year q (within the production range of 10,000 to 50,000 computers), is given by AC = 10 - 0.1Q + 0.3q
Is there a learning-curve effect?
Are there economies or diseconomies of scale?
During its existence, the firm has produced a total of 40,000 computers and is producing 10,000 computers this year. Next year it plans to increase production to 12,000 computers. Will its average cost of production increase or decrease? Explain.
Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output.
How does this tax affect the firm鈥檚 fixed, marginal, and average costs?
Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firm鈥檚 fixed, marginal, and average costs?
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