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Short-run and Long-run Economic Cost and Profits

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1. Suppose a firm is operating at the minimum point of its short-run average total cost curve, so that marginal cost equals average total cost. Under what circumstances would it choose to alter the size of its plant?

2. Explain: In the short-run, why might a firm still operate even when there is a loss?

3. Suppose a firm is producing 1,000 units of output (Q). Its average fixed costs are $100. Its average variable costs are $50. What is the total cost (TC) of producing 1,000 units of output (Q)? It the price (P) of the good is $200, what is total revenue? What is total profit?

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Solution Preview

Economic costs:

Fixed cost = costs that do not change no matter what quantity the firm produces
Variable cost = costs that depend on the quantity of output produced
Total cost = fixed cost + variable cost
Average cost = Total cost / quantity

1. The firm is minimizing its costs in the short run by optimizing its variable inputs such as labor. In the short run the firm cannot change its ...

Solution Summary

This solution gives a detailed summary of the formulas for calculating economic costs and answers 3 review questions about short-run and long-run production costs:

1. Why a firm would alter the size of its plant.
2. Why a firm might operate at a loss.
3. How to calculate a firm's total revenue and profit.

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Short run / Long run

You are a manager in a perfectly competitive market. The price in your market is $35. Your total cost curve is C(Q)= 10+2Q+0.5Q2.
a. What level of output should you produce in the short run?
b. What price should you charge in the short run?
c. Will you make any profits in the short run?
d. What will happen in the long run?
e. How would your answer change if your costs were C(Q)=80+5Q+30Q2 ?

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