Question

2. Short-run versus long-run costs and expenditures Aa Aa The following isoquants depict the technologically efficient bundles of labor and capital for producing 100 and 150 units of output (labeled IQ (Q - 100), and IQ IQ - 150), respectively). Suppose the firm is initially using the cost-minimizing bundle of labor and capital for producing 100 units of output, represented by point A. T XL- HO ---- XT X JQ10 - 1501 - 1010 - 1001 A 0 10 20 30 40 9 80 90 100 LABOR Imagine that the firm wants to compare the short-run expenditures and long-run costs associated with producing 100 units with the costs associated with other levels of production. Given that the firm is currently committed to 10 units of capital, complete the following table by entering the total amount the firm would have to spend on capital and labor at each level of production in both the short run and the long run if the wage rate (w) is $10 and rental rate of capital (c) is $20. Quantity Produced Short-Run Expenditures ($) (Capital is Long-Run Costs (5) (Capital is 100 150

Answer 1

Assuming in short-run the capital is 10 and in the long run it's 15 and we pay for just capital in the case of Quantity produced=0, we get

Quantity produced	Short-run costs(Capital is 10)	Long-run costs(Capital is 15)
0	10*20=200$	15*20=300$
100	10*20+20*10=400$	15*20+15*10=450$
150	10*20+60*10=800$	15*20+30*10=600$

False, According to this table, and plotting the values of short run costs and long run costs on graph, the firm's long run costs are in fact higher than the short run costs in the beginning(For Q=0 and Q=100) but eventually get less than the short run costs at a high quantity.

Hope it's clear. Do ask for any clarifications if required.