1. The presence of _______explains the negatively sloped portion

1. The presence of _______explains the negatively sloped portion of a long-run average-cost curve, and the notion of _______explains the horizontal portion of the curve.

2. Consider the information provided in Figure. Suppose the output of large aluminum firm drops from two million pounds to one million pounds per year. The long-run average cost of producing aluminum will go from $ _______to $ _______.


1. The presence of _______explains the negatively sloped portion


3. The typical short-run average-cost curve is shaped like the letter U, while the typical long-run average-cost curve is shaped like the letter L because _______are not applicable in the_______ run.
4. Deregulation and the Cost of Trucking. Suppose the government initially limits the number of trucking firms that can haul freight. The market for truck freight is served by a single firm that produces five million ton-miles of service per year, where one ton-mile is the hauling of one ton of freight one mile. The newly elected governor has proposed that other firms be allowed to enter the market. At a public hearing on the issue of eliminating the entry restrictions, the manager of the existing firm issued a grim warning: If you allow entry into the market, four or five firms will enter, and the unit cost of truck freight will at least triple. There are big economies of scale in trucking services, so a single large firm is much more cost-efficient than several small firms would be. What s your reaction to this statement?
5. Draw the Long-Run Cost Curve. Consider the long-run production of shirts. The cost of the indivisible inputs used in the production of shirts is $400 per day. To produce 1 shirt per day, the firm must also spend a total of $5 on other inputs labor, materials, and other capital. For each additional shirt, the firm incurs the same additional cost of $5.
a. Compute the average cost for 40 shirts, 100 shirts, 200 shirts, and 400 shirts.
b. Draw the long-run average-cost curve for 40 to 400 shirts per day.
6. Diminishing Returns versus Diseconomies of Scale. Explain the difference between diseconomies of scale and diminishing returns. Based on the cost curves you’ve seen in this chapter, which is more likely in firms?
7. Constant Marginal Cost. Consider a firm operating in the long run with an indivisible input that has a cost of $120. The marginal cost of production is constant at $3 per unit. Draw the firm’s long-run average-cost curve for 1 to 12 units of output. The long-run average cost drops from $ _______for the first unit to $_______ for the twelfthunit.

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