Question

1.        Is the basic difference between the short run and the long run that the law of diminishing returns applies in the long run, but not in the short run?

2.        Draw a typical production function and explain its shape. Below that diagram, draw an average product schedule and marginal product schedule. Indicate the relationship between the two diagrams.

##3         Explain why the marginal product of labour initially increases as more workers are hired and then eventually begins to fall.

4.        What is the relationship between the AP­L the MPL the AVC and MC curves? Use a diagram to assist your explanation.

##5.        What is meant by “increasing returns to scale”? What does this do to the shapes of the short and long run average cost curves.

6.        Show the effects of an increase in capital on the short run production function, the average product of labour and the marginal product of labour.

7.        What are the effects of an increase in capital on the MC, AVC and ATC?

8.        Is it possible for the ATC to be falling while the AVC is rising? Explain.

Answer 1

1) In the short run there are a mix of fixed inputs and variable inputs. In the long run there are no fixed inputs.

Diminishing returns sets in due to fixity of inputs. Increase in output is falling that is marginal product of a variable input is falling due to fixity of inputs. This is called diminishing returns.

In the long run there are no diminishing returns because all inputs are variable. In long run there are diseconomies or economies of scale leading to increasing or decreasing average cost.