Question

15.For any given output level, a firm's long-run costs Select one:

a. are always greater than or equal to its short-run costs.

b. are usually greater than or equal to its short-run costs except in the case of diminishing returns to scale.

c. are always less than or equal to its short-run costs.

d. are usually less than or equal to its short-run costs except in the case of diminishing returns to scale.

Answer 1

Cost- minimization problem:--

min wL + rk s.t Q = f(K,L)

This gives the first-order condition:

Long-run cost implies that all the factors are variable & hence the cost is minimized cost. This is because in the long-run cost minimization problem the first-order condition is that the isoquant and isocost should tangent. => MRTS = w/r

In short-run, factors like capital are fixed & hence the cost is not the cost minimized. This is because in the short-run MRTS = w/r not always possible. This is possible only when the short-run amount of fixed factor matches the long-run cost minimization fixed factor. Hence it will always greater than or equal to the long-run cost.

Hence the long-run cost is the lower envelope of the short-run cost.

Hence the correct answer is C