Question

Please help by providing detailed solutions and explanations for each step. Basically, a step by step guide to the answer would be much appreciated. Thank you.

SRATC LRAC SRATC SRATC D' E F Cost B с Output Q1 Q Q2 Q3 Q5 A) When referencing factors of production, what is meant by the short run, the long run, and the very long run? (3 marks) B) Why is it not possible for any point of a firm's SRATC to be below their LRAC? (1 mark) C) At what point on the above diagram has the firm reached minimum efficiency scale? (1 mark) D) For the LRAC, what is happening to both a firm's costs and returns to the right of the minimum efficiency scale point? (2 marks)

Answer 1

A) Short run is a period of time where some factors of production are fixed in supply whereas all other factors are variable. Long run is a period where all factors of production are variable. Also in the long run firms are able to adjust all cost whereas in short run, firm are able to influence price only through adjustments made to production levels. Very long run is also similar to long run where all factors of production are variable and also in very long run additional factors which are outside the control of the firm also changes like tchnology, government policy etc.

B) Long run average cost curve which is also known as planning curve or envelope curve is a locus of lowest average cost of producing various levels of output when all factors are variable. LAC curve is calle envelope curve because it envelopes all SAC and cannot exceed SAC. SInce in long run indivisible factors can be used to their full capacity, LAC curve will be tangent to various SAC and will not cut or rise above.

C) Minimum efficiency scale is lowest point on the cost curve at which a firm can produce its product at a competitive price. Also at this point a firm will be able to achieve economies of scale that is necessary to compete effectively in the industry. It is also a point below which LAC curve stops falling. In the diagram point 'B' is the minimum efficient scale.

D) To the right of minimum efficiency scale, that is point 'B', firms' cost of production will increase and returns will decrease.To the right of point B LAC is tangent to SAC at the rising portion of SAC.