Question

Consider the long-run production of shirts. The cost of the indivisible inputs used in the production of shirts is $500 per day. To produce one shirt per day, the firm must also spend a total of $4 on other inputs-labor, materials, and other capital. For each additional shirt, the firm incurs the same additional cost of $4.

1. Compute the average cost for 20 shirts, 50 shirts, 100 shirts, and 500 shirts.
2. Draw the long-run average cost curve for 20 to 500 shirts per day.

Answer 1

Fixed cost = 500 per day

Variable cost per shirt =4

a) average cost = Total cost/ Total units

Total cost for 20 shirts per day = 500 + 4 * 20 = 580

average cost for 20 shirts per day = 580/20 = 29

Total cost for 50 shirts per day = 500 + 50*4 = 700

average cost for 50 shirts per day = 700/50 = 14

Total cost for 100 shirts per day = 500 + 100*4 = 900

average cost for 100 shirts per day = 900/100 = 9

Total cost for 500 shirts per day = 500*4 + 500= 2500

average cost 500 shirts per day = 2500/500 = 5