Question

a)   Campus Sweaters has one worker and one machine and then adds one more worker and one more machines and output rises from 20 units a day to 50 units a day. Is Campus Sweaters making a short-run or long-run decision to add input? Explain.
b)   From the above information, on which part of the LAC is the company operating? Explain.
c)   In the short-run, Campus Sweaters is selling sweaters for $20 each. Which curves determine the profit maximizing level of output?
d)   In part ‘c’, at this profit-maximizing level of output, AVC is $21. What is the short-run choice for this company? Discuss.

Answer 1

a) campus sweaters is increasing both labour and capital which means there is no fixed input. This indicates that the decision making is done in long run because only in the long run both inputs are variable

b) we can see that when inputs are doubled, output is more than double which means there are increasing returns to scale. Hence there must be declining average total cost which shows that the firm is operating on the the declining portion of the long run average cost curve

c) marginal cost curve will determine the profit maximizing level of output because price is fixed and marginal cost is the supply function of the firm

d) Market price is $20 and average variable cost is $21 at the profit-maximizing level of output. Since average variable cost is greater than the price, firm is not able to cover its variable cost. Hence it should shut down its operations in the short run .