Microeconomics Analize the following questions: 1. Analize why unit costs per un
ID: 1104796 • Letter: M
Question
Microeconomics
Analize the following questions:
1. Analize why unit costs per unit in the short rin should always be higher/greater or iqual to the costs per unit on a long term. It be wise/prudent to consider the definitions of short term and long term.
2. The performence law decresing establishes that after the determined period, the variable cost per unit should increas when the production increases on short term. Should the variable cost per unit increase, after a determined period, when the long term production increases? What factors affect the cost per unit of production on long term?
3. Analize why a economig earning equal to zero could be norm on a competitve market on lomg term; but not in short term. Relations of input variables of production, costs of production, productions and earnings on short and long term shoul be analized.
Explanation / Answer
1. Average unit costs in the short run should always be higher/greater or equal to the costs per unit on a long term because short run has fixed factors and variable factors which forces the firm to remain inflexible with the combination that it uses. Hence a higher price input cannot be replaced in the short run with much ease and flexibility while in the long run this flexibility is ensured as all factors are variable.
2. The performence law decresing establishes that after the determined period, the variable cost per unit should increas when the production increases on short term. In the long run also, even though there are no seperate variable or fixed costs but all costs are variable, the per unit cost falls, becomes stable and constant and then rises rapidly as output rises. This givs rise to economies and diseconomies of scale
3) An economig earning equal to zero could be normal on a competitve market on long term; but not in short term. This is because in the short run, there are no entry or exit and so firms cannot leave. Hence they have to bear losses. In the long run this barrier is removed and so firms leave when they incurr losses or enter when existing ones are earning profits.This entry and exit is stopped when there are no more losses or profits so that in the long run equilibrium, economic losses or profits are zero.