Question

1. In the following graph, a firm's short run total cost curve is given as ABCD and its long run total cost curve is given as OBEF. This fimm's short run total cost curve ABCD is tangent to its long run total cost curve OBEF at point B. (a) Draw this firm's short run average cost curve and long run average cost curve. [6 marks] (b) Draw this firm's short run marginal cost curve and long run marginal cost curve. [6 marks]

Answer 1

Average total cost, $ LRAC SRAC SRAC SRAC Quantity', nits The long-run average cost (LRAC) curve is an envelope curve of the short-run average cost (SRAC) curves. Increasing, constant and decreasing returns to scale are exhibited at points a, b and c, respectively.

We know that as per the Cost Analysis Theory, the long run average cost curve is derived mostly from the minimum points of the short run average cost curves, because of which the long run average cost curve is also called as Envelop Curve that is tangent to the each and every short run average curve at some point. The points a, b and c represents th stages of increasing, constant and decreasing return to scale respectively.

If the given Short run Tatal Cost Curve is derived at the time period of Increasing return to scale, then the Short run average cost which is tangent to Long run average cost curve at point "a", then SRAC1 will be the required short run average cost curve along with the obtained LRAC for the given details.

If the given Short run Tatal Cost Curve is derived at the time period of Constant return to scale, then the Short run average cost which is tangent to Long run average cost curve at point "b", then SRAC2 will be the required short run average cost curve along with the obtained LRAC for the given details.

If the given short run Tatal Cost Curve is derived at the time period of Decreasing return to scale, then the Short run average cost which is tangent to Long run average cost curve at point "c", then SRAC3 will be the required short run average cost curve along with the obtained LRAC for the given details.

SMC LMC SMC S4C Cast SVC. Output

According to Cost Analysis Theory, Shrort run Marginal Cost curve (SRMC curve) passes through the minimum point of the Short run average cost curve (SRAC curve). and also that the Long run Marginal Cost curve (LRMC curve) passes through the minimum point of th of the Long run Average Cost curve (LRAC curve) where the LRAC curve is tangent to the SRAC curve that too only when there is constant return to scale is the operating phenomina.

If the given Short run Tatal Cost Curve is derived at the time period of Increasing return to scale, then the Short run Marginal cost curve (SRMC1) which is passing through the minimum point of SRAC1 will be the required short run marginal cost curve along with the obtained LRMC curve for the given details.

If the given Short run Tatal Cost Curve is derived at the time period of constant return to scale, then the Short run Marginal cost curve (SRMC2) which is passing through the minimum point of SRAC2 will be the required short run marginal cost curve along with the obtained LRMC curve for the given details.

If the given Short run Tatal Cost Curve is derived at the time period of decreasing return to scale, then the Short run Marginal cost curve (SRMC3) which is passing through the minimum point of SRAC3 will be the required short run marginal cost curve along with the obtained LRMC curve for the given details.