1) In long run, your company can change variable cost as well as fixed cost. Whe
ID: 1130693 • Letter: 1
Question
1) In long run, your company can change variable cost as well as fixed cost. When you extend the time horizon, the fixed decisions in short run become variable decisions in long run. Specifically, you can only decide how many programmers you should hire in short run, but in long run, you can decide the number of the office rooms, computers, and furniture. You can also decide whether you want to enter or exit one market[1].
2) In long run, if your company is already in the market, and for some reasons, the market price decreases to $5, what is your optimal decision? Why?
3) In long run, firms will enter one market when market price (P) is higher than average total cost (ATC), and will exit the market when market price is lower than average total cost. Why?
4) In long run, if the equilibrium market price is $7.553, then the maximum profit of your company is almost zero. Will you stay in this market or not?
5) Long-run average total cost curve. As we know, in long run, you can change fixed costs and variable costs of your company. Table 4 shows the average total cost (ATC) under different levels of fixed cost (smaller fixed cost is equivalent to smaller firm scale) and different amount of output. Can you draw the short-run ATC curves in different fixed costs? Can you draw the long-run ATC curve according to these short-run ATC curves?
Table 4: Short-run ATC in different scales
1000 lines of
codes
scale 1
scale 2
scale 3
scale 4
scale 5
10
13
14
10
18
7.6
12.564
22
5.8
9.423
26
4.6
6.9102
11.352
30
4
5.0256
8.256
34
4
3.7692
5.7792
38
4.6
3.141
3.9216
12
42
5.8
3.141
2.6832
9
46
7.6
3.7692
2.064
6.6
50
10
5.0256
2.064
4.8
12.61
54
13
6.9102
2.6832
3.6
9.7
58
9.423
3.9216
3
7.372
62
12.564
5.7792
3
5.626
66
8.256
3.6
4.462
70
11.352
4.8
3.88
74
6.6
3.88
78
9
4.462
82
12
5.626
86
7.372
90
9.7
94
12.61
6) What is the relationship between short-run and long-run ATC curves? Which one is relatively flat?
1000 lines of
codes
scale 1
scale 2
scale 3
scale 4
scale 5
10
13
14
10
18
7.6
12.564
22
5.8
9.423
26
4.6
6.9102
11.352
30
4
5.0256
8.256
34
4
3.7692
5.7792
38
4.6
3.141
3.9216
12
42
5.8
3.141
2.6832
9
46
7.6
3.7692
2.064
6.6
50
10
5.0256
2.064
4.8
12.61
54
13
6.9102
2.6832
3.6
9.7
58
9.423
3.9216
3
7.372
62
12.564
5.7792
3
5.626
66
8.256
3.6
4.462
70
11.352
4.8
3.88
74
6.6
3.88
78
9
4.462
82
12
5.626
86
7.372
90
9.7
94
12.61
Explanation / Answer
1) in short run some factors are fixed and some are variable. but in long run all factors are variable. so, in long run firm can increase their output by adjusting factors and reduce their cost of production.
2) if the market price decreases to $5 then i should compare it with average variable cost and average total cost of per unit. if price still greater than average total cost then i will remain in the market and earns supernormal profit and if price less than average total cost but greater than average variable cost then i will remain in the market and will operate in losses because my variable cost are covered. if price less than and equal to average variable cost then i will shut down my business.
3) when price is greater than average total cost then firm earns supernormal profit. by seeing this new firm enter into the market and when price is lower than average total cost then firm operate at losses and they exit the market.
4) if at market equilibirium price, my company earns 0 profit, i will stay in the market because at zero profit i am earning normal profit.
6) short run average total cost are always greater than or equal to long run average total cost but never be
than long run average total cost. so long run average total cost is relatively flat.
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