Chapter 7: Long Run Cost Compared with
Short Run Costs
Supplemental Instruction
Iowa State University
(1)
Output
(per Day)
0
Leader: Veronica
Course: Econ 101
Instructor: Kreider
Date: 10-28-14
(2)
Capital
(3) Labor
(4) TFC
(5) TVC
(6) TC
1
0
$ 150
$0
$ 150
(7) MC
(8) AFC
(9) AVC
(10) ATC
—
—
—
$5
$ 10/3
$25/3
$ 15/7
$ 20/7
$5
$ 5/4
$ 10/4
$ 45/12
$ 15/16
$ 10/4
$ 55/16
$ 15/19
$ 50/19
$ 65/19
$ 15/21
$ 60/21
$ 75/21
$ 10/3
30
1
1
$ 150
$ 100
$ 250
$ 10/4
70
1
2
$ 150
$ 200
$ 350
120
1
3
$ 150
$ 300
$ 450
$2
$ 10/4
160
1
4
$ 150
$ 400
$ 550
$ 10/3
190
1
5
$ 150
$ 500
$ 650
210
1
6
$ 150
$ 600
$ 750
$5
Table 1: Clean ‘n’ Shine Output
a. Over what range of output does Clean ‘n’ Shine experience increasing marginal returns to
labor?
Form 70 to 210
b. Over what range does it experience diminishing marginal returns to labor?
From 0 to 120
c. As output increases, how does average fixed costs behave?
As output increases average fixed costs decrease
d. As output increases, how does marginal cost, average variable cost, and average total cost
behave?
As output increases marginal cost first decreases then increases, and Average total cost
first decreases then increases.
e. Looking at the numbers in the table, but without drawing any curves, what is the relationship
between MC and AVC? What about the relationship between MC and ATC?
The ATC is above the AVC curve at all times. Also the MC crosses the AVC
and ATC at their respective minimums.
2. Fill in Chart:
Term
Long-run total cost
Symbol and/or
Formula
LRTC
Definition
The cost of all inputs in the long run
Long-run average
LRATC = LRTC/Q
Cost per unit in the long run
total cost
3. Define:
a. Diseconomies of Scale: Long-run average total cost increases as output increases.
b. Constant Returns to Scale: Long-run average total cost is unchanged as output increases.
c. Minimum efficient Scale: The lowest output level at which the firm’s LRATC curve hits
bottom.
d. Economies of Scale: Long-run average total cost decreases as output increases.
1060 Hixson-Lied Student Success Center  515-294-6624  sistaff@iastate.edu  http://www.si.iastate.edu
4. The following table gives the short-run and long-run total costs for various levels of output of
Consolidated National Acme, Inc.:
Q
0
1
2
3
4
5
6
7
TC1
0
300
400
465
495
540
600
700
c.
TC2
350
400
435
465
505
560
635
735
a.
Which column, TC1 or TC2, gives longrun total cost, and which gives short-run total cost?
How do you know?
TC1 is Long run & TC2 is short run.
You know because TC1 has no fixed costs & in long
run cost curves all inputs are variable.
b.
For each level of output, find short-run
TFC, TVC, AFC, AVC, and MC.
At what output level would the firm’s short-run and long-run input combinations be the
same? At a quantity of 3
d.
Over what range of output do you see economies of scale? Diseconomies of scale?
Constant returns to scale?
For TC1: Economies of Scale from 0-6. Constant returns to scale from 6-7. No Diseconomies of Scale
For TC2 : Economies of Scale from 0-7. No Constant returns to scale. No Diseconomies of Scale
5. “If a firm has diminishing returns to labor over some range of output, it cannot have economies of
scale over that range.” True or false? Explain briefly. True because they are opposites of each other.
5. Fill in the Blank:
a. In the long run, there are no fixed inputs or fixed costs; all inputs and all costs are variable.
b. The long-run total cost of producing a given level of output can be less than or equal to, but
not greater than, the short-run total cost (LRTC ≤ TC)
c. The long-run average cost of producing a given level of output can be less than or equal to,
but not greater than, the short-run average total cost (LRATC ≤ ATC).
d. A firm’s LRATC curve combines portions of each ATC curve available to the firm in the long
run. For each output level, the firm will always choose to operate on the ATC curve with the
lowest possible cost.
e. in the short run, a firm can only move along its current ATC curve. In the long run, however,
it can move from one ATC curve to another by varying the size of its plant. As it does so, it
will also be moving along its LRATC curve.
f. When long-run total cost rises proportionately less than output, production is characterized by
economies of scale, and the LRATC curve slopes downward.
g. when long-run total cost rises more than in proportion to output, there are diseconomies of
scale, and the LRATC curve slopes upward.