Question

LIIS IS dll ustry and the long run supply curve is_ horizontal 3a. Does "returns to scale" refer to the long or short run average cost curves? Rehirns ho scalssless the Doutput when All s are changed by the 3b. If returns to scale are increasing, what does this imply about average cost? 3c. If returns to scale are constant, what does this imply about average cost? 3d. If returns to scale are decreasing, what does this imply about average cost? MCL Figure 1 $/Coat 4. Figure 1 shows long run 100 average and marginal cost curves for Shatakshi's Coats. If she is 80 a price taking firm and the current market price of coats is $70, you anticipate that she will produce coats. Now carefully draw in the short run cost curves AVC, ACs, or MCs you expect if 20 Shatakshi is producing this level of 10 output in the long run. 10 20 30 40 50 60 70 80 90 100 Coat Output/Day

Answer 1

3a) returns to scale is long run concept

bcoz all inputs are assumed to be variable, no input is fixed in long run,

Bcoz for returns to scale concept, we see how the Output level changes , as we change all inputs

b) AC is falling

for IRS, as we double all inputs, output rises by more than double, so Cost function is Concave, cost is increasing at decreasing rate

thus AC falls

C) AC is Constant

for CRS, cost function is linear, so AC will be constant

d) AC is rising

for DRS, as inputs double, Output rises by less than double, so codt function is convex, thus AC rises, as Q rises..

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its mandatory to answer only first Question with first four sub parts