Professional Documents
Culture Documents
The Firm:
Cost and Output
Determination
Short Run versus Long Run
• Short Run : A time period when at least one input, such as plant size, cannot be
changed . ( Plant Size The physical size of the factories that a firm owns and operates
to produce its output
• Long Run : The time period in which all factors of production can be varied
• Production Function
– The relationship between maximum physical output and the quantity of capital and labor
used in the production process
Output per time period = some function of capital and labor inputs
or
Q = ƒ(K,L)
Q = output / time period / K = capital L = labor
• Total Costs
– The sum of total fixed costs and total variable costs
• Fixed Costs
– Costs that do not vary with output and are fixed for a certain period of
time, i.e. rent on a building
• Variable Costs
– Costs that vary with the rate of production, i.e. wages paid to workers
and purchases of materials
• Marginal Cost
– The change in total costs due to a one-unit change in
production rate
• Planning Curve
– The long-run average cost curve.
• Economies of scale
• Constant returns to scale
• Diseconomies of scale
– Dimensional factor
• Large-scale firms often require proportionately less input per unit of
output
A) ₪120
B) ₪140
C) ₪144
D) Uncertain. We need to know the interest rate.
Suppose a family-owned grocery has ₪80,000 in total revenues, ₪36,000 in rent, and ₪20,000 in
additional operating costs. The husband and wife work in the shop and pay no wages to themselves or
others. The economic profits from the shop are
A) ₪2424,,000
000..
B) less than ₪2424,,000
000..
C) more than ₪24 24,,000
000..
D) ₪8080,,000
000..