Chapter 2: Concepts From The Theory Of The Firms

Question 1

Long run and short run

Answer 1

• Some factors of production can be adjusted faster than others e.g. fertiliser versus planting more trees
• Long run: all factors can be changed
• short run: some factors cannot be changed
• no specific duration separates long and short run
• long run = long term
• short run = short term

Question 2

In the short run, some costs are variable and others are fixed: variable costs

Answer 2

• Labour
• materials
• fuel
• transportation

Question 3

In the short run, some costs are variable and others are fixed: Fixed costs (amortised)

Answer 3

• Equipment
• land
• overheads

Question 4

In the short run, some costs are variable and others are fixed: quasi-fixed costs

Answer 4

Start up costs of a power plant

Question 5

In the short run, some costs are variable and others are fixed: rest

Answer 5

Sunk costs versus recoverable costs

Question 6

When should I stop producing?

Answer 6

• Marginal cost equals cost of producing one more unit
• If MC > price Next unit costs more than it returns
• if MC < Price next unit returns more than a costs
• Profitable only if Q4> Q1 because of fixed costs

Question 7

Costs: economists perspective: opportunity cost

Answer 7

• What would be the best use of the money spent to make the product?
• not taking the opportunity to sell or at a higher price represents a cost

Question 8

Costs: economists perspective: examples

Answer 8

• Use the money to grow apples or put it into the bank where it owns interests?
• growing apples or growing Kiwis?

Question 9

Costs: economists perspective

Answer 9

• Comparisons should be made against the normal profit: what putting money in the bank would bring
• selling at cost means making a normal profit: usually not good enough because it does not compensate for the risk involved in the business