Answer to Question #158072 in Microeconomics for Towseef Ahmad

Question

 Differentiate between a long-run and a short-run cost function. 5

(b) (i) Describe the relationship between the short-run and long-run average cost curves. 5

(ii) Why the long-run average cost curve also called the envelope curve? 5

(iii) Using an appropriate diagram, explain how does the long-run marginal cost derived? 5

Answer 1

i

Short-run average cost function assume the existence of fixed costs, and only variable costs were allowed to change.

The long run average cost function is a U-shaped curve that shows all possible levels of output plotted against average cost for each level. It contains all possible short run average total costs curves for the firm.

ii

The long run average cost curve is called an envelope curve because it takes the scallop shape. h

The following figure shows how the slopes of the short-run average cost curves leads to the attainment of LRAC which is a scallop shaped which is why it is called the envelope curve.

The long run marginal cost intersects the long run average cost at its minimum point. This point is also the minimum point of the short run average cost curve.

At this point, SRAC = SRMC when LRAC = LRMC.

This fact showd that LRAC reflects the laws of returns to scale and the LRMC reflects the long run cost resulting from the production of the last unit of output which does not make the LRMC a U-shaped or scallop shaped.