Long Run Planning and Costs in Economics

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Questions and Answers

What happens to the marginal cost curve (MC) when the wage rate or another component of variable cost increases?

Shifts upward

When there's a technological change that increases productivity, what happens to the average cost curve (AP)?

Shifts downward

In the long run, what major decisions can a firm make regarding factors of production?

Decide on the scale of operations and whether to be capital or labor intensive

How does a technological improvement impact short-run cost curves?

Shifts them downward Signup and view all the answers

What effect does a technological change that increases productivity have on the total product curve (TP)?

Shifts TP upward Signup and view all the answers

In the long run, why is the law of diminishing returns considered irrelevant?

All factors of production are variable Signup and view all the answers

In the long-run planning of a firm, which of the following cost structures is most relevant?

Returns to scale (economies of scale) Signup and view all the answers

What principle guides a firm into choosing the optimal factor mix in the long run?

Marginal decision rule Signup and view all the answers

When does a firm find it optimal to be labour-intensive in a labour abundant country?

When the marginal benefit of the reallocation exceeds the marginal cost Signup and view all the answers

Which factor of production is considered fixed in the short run?

Capital Signup and view all the answers

What is the relationship between total product (TP), marginal product (MP), and average product (AP) as diminishing returns set in?

TP, MP and AP all decrease Signup and view all the answers

What is the main difference between the short run and the long run in terms of costs?

All costs are variable in the long run Signup and view all the answers

What determines the number of firms operating in an industry?

The cost structure of the industry Signup and view all the answers

When increasing returns persist for very large output levels, what is the tendency in an industry?

Economies of scale extend beyond market size Signup and view all the answers

What does a firm seek to equate for all factors of production in the long run?

The ratio of marginal product to price Signup and view all the answers

What is shown by the long-run average cost curve?

The lowest cost per unit at which each quantity can be produced Signup and view all the answers

What may a firm experience as it increases its production scale?

Economies of scale, constant returns to scale, or diseconomies of scale Signup and view all the answers

What is the term for an industry where only one firm operates and average costs are minimized?

Natural monopoly Signup and view all the answers

Study Notes

Number of firms in an industry is influenced by cost structure, with constant returns to scale allowing small and large firms to coexist.
Industry with increasing returns over small output levels may have many small firms, while industries with increasing returns at large output levels can lead to a natural monopoly.
Examples of industries with constant returns to scale include furniture, food processing, and small appliance industries.
Examples of industries with a wide range of constant returns to scale include the motor industry, chemical plant and steel industries, as well as ICT companies like Google, Apple, IBM, and Microsoft.
In the long run, firms make decisions based on the marginal decision rule to minimize costs and choose the optimal factor mix, considering economies of scale and factors of production.

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