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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 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.

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 ...

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