Long-Run Production Costs - AP Microeconomics

1. Identify the market structure most consistent with a natural monopoly caused by scale economies.

   Monopoly. Natural monopolies arise from persistent economies of scale.

2. What is the relationship between LRATC and the short-run $ATC$ curves?

   LRATC is the lower envelope of short-run $ATC$ curves. Each point touches one short-run curve at its minimum.

3. If LRATC at $Q=40$ is $6$ and at $Q=80$ is $7$, what scale effect occurs?

   Diseconomies of scale. LRATC rises from $6$ to $7$, showing scale disadvantages.

4. What does a large MES relative to market demand imply about market structure?

   Fewer firms; greater likelihood of oligopoly or monopoly. High MES creates barriers to entry for small firms.

5. What is the definition of diseconomies of scale?

   As $q$ rises, $LRATC$ rises. Larger scale production increases per-unit costs.

6. Which part of the LRATC curve corresponds to diseconomies of scale?

   The upward-sloping portion of LRATC. Cost per unit increases with scale in this region.

7. What is the formula for long-run average total cost?

   $LRATC(q)=\frac{LRTC(q)}{q}$. Divides total cost by quantity to find per-unit cost.

8. What does it mean that the LRATC curve is an "envelope" of short-run ATC curves?

   At each $q$, $LRATC$ is tangent to the lowest feasible short-run $ATC$. Firm chooses the plant size with lowest $ATC$ for each output.

9. What is the definition of long-run marginal cost (LRMC)?

   Change in long-run total cost from producing one more unit. Slope of LRTC curve when all inputs adjust optimally.

10. Identify the scale condition when output doubles and total cost less than doubles.

    Economies of scale (increasing returns to scale). Cost rises less than proportionally to output.

11. Identify the condition for the minimum point on the LRATC curve.

    Transition from economies of scale to diseconomies of scale. Where increasing returns end and decreasing returns begin.

12. What is the definition of the long run in production cost analysis?

    All inputs are variable; there are no fixed costs. Firms can adjust all factors of production over time.

13. What does a small MES relative to market demand imply about market structure?

    Many firms; greater likelihood of monopolistic competition. Low MES allows many efficient firms to coexist.

14. If $LRMC<LRATC$ at some output, what happens to $LRATC$ as output increases slightly?

    $LRATC$ decreases. Adding units below average pulls the average down.

15. What is the minimum efficient scale (MES) on the $LRATC$ curve?

    The output where $LRATC$ first reaches its minimum level. Smallest output achieving lowest possible per-unit cost.

16. What is the definition of the long run in production costs?

    All inputs are variable; there are no fixed costs. Firms can adjust all factors of production over time.

17. Identify the scale condition when output doubles and total cost more than doubles.

    Diseconomies of scale (decreasing returns to scale). Cost rises more than proportionally to output.

18. What is the definition of the long-run average total cost curve (LRATC)?

    The lowest attainable $ATC$ at each output when the firm can vary plant size. Represents optimal plant size choices for each output level.

19. What is the relationship between $LRMC$ and $LRATC$ at the minimum of $LRATC$?

    $LRMC=LRATC$ at the output where $LRATC$ is minimized. Marginal equals average when average is at its minimum.

20. Which part of the LRATC curve corresponds to constant returns to scale?

    The flat (horizontal) portion of LRATC. Cost per unit remains unchanged with scale here.

21. What is the definition of economies of scale?

    As $q$ rises, $LRATC$ falls. Larger scale production reduces per-unit costs.

22. What is minimum efficient scale (MES) on the LRATC curve?

    Lowest output where LRATC reaches its minimum. Smallest scale at which unit costs are minimized.

23. What is the definition of economies of scale in the long run?

    LRATC falls as output increases. Larger scale production reduces per-unit costs.

24. What is the definition of constant returns to scale in cost terms?

    As $q$ rises, $LRATC$ is constant. Per-unit costs remain unchanged as production scales.

25. Which part of the LRATC curve corresponds to economies of scale?

    The downward-sloping portion of LRATC. Cost per unit decreases with scale in this region.

26. If LRATC at $Q=100$ is $12$ and at $Q=200$ is $9$, what scale effect occurs?

    Economies of scale. LRATC falls from $12$ to $9$, showing cost advantages.

27. Identify the scale condition when output doubles and total cost exactly doubles.

    Constant returns to scale. Cost rises proportionally with output.

28. If $LRMC>LRATC$ at some output, what happens to $LRATC$ as output increases slightly?

    $LRATC$ increases. Adding units above average pulls the average up.

29. What is the definition of long-run average total cost (LRATC)?

    Minimum $ATC$ at each output when all inputs are variable. Envelope of all possible short-run cost curves.

30. Which output range on $LRATC$ corresponds to diseconomies of scale?

    Outputs where $LRATC$ is upward sloping (right of the minimum). Per-unit costs rise as output increases in this range.

31. If LRATC at $Q=50$ is $8$ and at $Q=100$ is $8$, what scale effect occurs?

    Constant returns to scale. LRATC stays at $8$, showing no scale advantages.

32. Which output range on $LRATC$ corresponds to economies of scale?

    Outputs where $LRATC$ is downward sloping (left of the minimum). Per-unit costs decline as output increases in this range.

33. What is the definition of long-run total cost (LRTC)?

    Minimum total cost of producing $Q$ when all inputs are variable. Optimal combination of inputs for each output level.

34. Identify the cost concept: spreading fixed costs over more output in the long run.

    Not applicable; there are no fixed costs in the long run. All costs are variable when inputs can be adjusted.

35. What is the definition of diseconomies of scale in the long run?

    LRATC rises as output increases. Coordination problems increase per-unit costs at large scale.

36. What is the relationship between long-run total cost and output?

    LRTC is the minimum cost to produce each $q$ with all inputs variable. Firms choose optimal input combinations to minimize cost at each output level.

37. What is the formula for long-run marginal cost?

    $LRMC(q)=\frac{\Delta LRTC}{\Delta q}$. Measures the change in total cost from producing one more unit.

38. What is the definition of constant returns to scale in the long run?

    LRATC is constant as output increases. Proportional input increases yield proportional output.

39. Which option is true about the long-run choice of plant size?

    The firm chooses the plant that minimizes $ATC$ for its output. Firms select optimal scale for their production level.

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