ECON 1150 8.1 The Long Run: No Fixed Factors

What happens at the point of MES?

All available economies of scale have been realized

What is being encountered during a flat portion?

Constant costs over the relevant range of output, meaning that the firm's long-run average costs do not change as its output changes.

If the curve is flat over some range of output, we say the firm is exhibiting?

Constant returns to scale

Over the range of output where the LRAC curve is falling, the firm is experiencing?

Decreasing unit costs or economies of scale

Profit-maximizing firms employ factors of production such that the marginal products per dollar spent on each factor are?

Equalized

With increasing returns to scale, average costs must be?

Falling

In the SR, when at least one factor is fixed, the only way to adjust output is to adjust the input of the variable factors. One way to accomplish this is to...?

Increase labour

In the long run, increases in output are accomplished with?

Increases in the firm's scale of operations

Over the range of output where the LRAC curve is rising, the firm is experiencing?

Increasing costs or decreasing returns

The LRAC curve represents the ________ cost for each level of output?

Lowest possible

In the long run, if a firm is maximizing its profits while producing a given level of output, then this firm is also ________ its costs.

Minimizing

The ______ is the smallest output at which LRAC reaches its minimum.

Minimum efficient scale (MES)

As output increases, average costs are?

Rising

Each SRAC curve is _______ at some point to the LRAC curve.

Tangent

A firm seeking to maximize profits must also minimize costs since

The failure to do so negates the possibility of maximum profit

When the relative prices of inputs change firms use relatively more of the cheaper input and relatively less of the more expensive unit?

The principle of substitution

The LRAC curve shows the lowest possible cost of producing each level of output when all inputs can be varied?

True

The SRATC curve shows the lowest possible cost of producing any output when one or more factors are fixed?

True

Cost minimization does NOT guarantee maximum profit

True, because a firm may be minimizing costs for an incorrect output level

In the long run, all factors of production are?

Variable, because there are no fixed factors

Are factor prices assumed to be fixed?

Yes, the firm's output must be increasing exactly in proportion to the increase in inputs, when this happens, the constant-cost firm is said to have constant returns to scale