Chapter 9B: Long Run

Question 1

What is the long run

Answer 1

It is a period long enough for the firm to change the quantity of all the inputs in the production process as well as the process itself

Question 2

What are the characteristics of the long run

Answer 2

• No fixed inputs, costs or diminishing returns
• When inputs are variable, there is flexibility in the firm such as building a new factory or installing new equipment
• However, adjusting inputs is determined by the characteristics of the firm: the firm’s production process and institutional environment

Question 3

Returns to scale

Answer 3

It compares the long run relationship between inputs and output (vary all inputs by a certain percentage)

Question 4

What three situations can be distinguished in the returns to scale

Answer 4

• Constant returns to scale
  % inputs = % output
  Doubling inputs = doubling output
• Increasing returns to scale
  % inputs = larger % output
  Doubling of inputs = trebling of output
• Decreasing returns to scale
  % inputs = smaller % output
  100% increase in inputs = 50% increase in output

Question 5

What is the economies of scale

Answer 5

Is the relationship between costs and output, specifically a decline in unit costs as output expands
- Cost per unit produced decreases as production increases
- Gets cheaper per unit the more you produce

Question 6

Name a reason why economies of scale occur

Answer 6

Bulk buying - if you buy a large quantity then the average cost will be lower

Question 7

Diseconomies of scale

Answer 7

• This occurs when unit cost increases as output cost increases.
• Cost per unit produced increases as the production increases

Question 8

Diseconomies of scale can occur for which reasons

Answer 8

• Lack of control: when there is a large number of workers it’s easier to escape with not working very hard because it is more difficult for managers to notice neglect

Question 9

What is economies of scope

Answer 9

It refers to the cost savings achieved by producing related goods in one firm rather than producing those goods in two separate firms

Uses same capital intensive input for production of both products

Question 10

All inputs in the Long run a variable, economies and diseconomies of scale can occur
True or False

Answer 10

True

Question 11

What are the three assumptions of the long run average cost

Answer 11

1. Prices of production functions are given
2. State of technology and quality of production functions are given
3. Firm choose the lowest cost combinations of production functions to produce each level of output