Question

Define clearly the following concepts: a. Economics of scale. b. Constant return-to-scale. c. Short run and Long run.

2. The Best Computer Company just developed a new computer chip on which it immediately acquires a patent. a. Draw the AR curve, MR Curve, MC curve for this company.

b. Label the profit maximizing price and quantity for this company.

c. Show the area depicting consumer surplus, producer surplus (profits), cost of production of the chip for this company. You may use alphabets to show the areas

. d. Also show the deadweight loss associated with the production.

Answer 1

Answer:

A) economies of scale is the concept defined as where there is decrease in the long run average total cost when the level of production of the particular good increases.

B) The constant returns to scale is when with the increase in the level of inputs like labour and capital causes the same proportional increase in the output of the good.

C) The long run period of time is the time where all the factors of production and costs are variable. But the short run is the time period where firms can only influence the price level by changing the level of production.

2) MR and MC curves are the marginal revenue and cost curves of the firm. The price where profit is maximum is when MR is equal to MC. The deadweight loss for the same is when there is excess burden because of inefficiency and equilibrium is not achieved.