Question5 Seh a In the context of production clearly explain

Question5 Seh a) In the context of production, clearly explain the difference between \"production in short-run and \"production in the long-run (b) Clearly explain what the average total cost (ATC) curve for a frm in the shot nun loodks like. Explain the intuition for the shape of the ATC curve in the*rtn In the box below ke sure you answer ALL parts (al-(bil and clearly libel each part your answer (part (a), (b), etc MacBook Air

Solution

a).

The production function represent the technological relationship between inputs and output, => as the levels of input changes the output production also changes.

Now, in the SR all input are not variable, => new inputs are fixed and few are variable. So, consider a production function having two inputs “labor” and “Capital”, => mathematically it looks like.

=> Y = f(K0, L)”, here “K” is fixed at “K0” and “L” is variable here. So, this is an example of SR production function.

Now, in the LR all the inputs are variables, => the firm can move all the inputs. So, the example of LR production function is given by, Y = f(K, L), here “L” and “K” both are variable.

b)

As we know that in the SR there are “fixed cost” as well as “variable cost”. So, the “ATC” is the total cost per unit of output. So, the SR “ATC” is “U” shape curve, because when the variable factor is low in quantity the fixed inputs will be employed efficiently, => the “cost” per unit of output decreases as “Y” increases. Now when in the SR the variable input is too much compare to the variable input, => the fixed inputs will be employed inefficiently, => the “cost” per unit of output starts rising.

So, the SR “ATC“ is “U” shaped.