Answer to Question #111286 in Microeconomics for ARVIND kumar

Question

Describe with help of diagram intersection between the short run average total cost curves and long run average total cost curve given that firm has five palnt to consider viz 1,2,3,4,5(ASCENDING ORDER of their size) wherein plant size 3 turn out to be optimal plant size in long run

Answer 1

Both the short run and costs in the long run depend on the firm’s level of output, the costs of factors, and the quantities of factors needed for each level of output. The main difference between long- and short-run costs is there are no fixed factors in the long run. There are thus no fixed costs. All costs are variable, so we do not distinguish between total variable cost and total cost in the long run: total cost is total variable cost.

The long-run average cost curve shows the firm’s lowest cost per unit at each level of output, assuming that all factors of production are variable. The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output. The costs it shows are therefore the lowest costs possible for each level of output. It is important to note, however, that this does not mean that the minimum points of each short-run ATC curves lie on the LRAC curve. This critical point is explained in the next paragraph and expanded upon even further in the next section.

Relationship Between Short-Run and Long-Run Average Total Costs” shows how a firm’s LRAC curve is derived. Suppose a firm has five plant to consider 1,2,3,4,5.We have already seen how a firm’s average total cost curve can be drawn in the short run for a given quantity of a particular factor of production, such as capital. In the short run,the firm might be limited to operating with a given amount of capital; it would face one of the short-run average total cost curves shown in Relationship Between Short-Run and Long-Run Average Total Costs.” If it has a given units of plants, for example, its average total cost curve is average total cost. In the long run the firm can examine the average total cost curves associated with varying levels of capital.The point of intersection betwen the shortrun and long run average cost is the optimum size which is at plant 3 .