In Modules 3 and 4 we explained how consumers and businesses are better able to adjust purchases and production when they have more time. We are now going to explore this distinction between the short run and long run, and in particular what it means for the businesses' ability to vary the size of their operation and facility.
In Modules 3 and 4 we explained how consumers and businesses are better able to adjust purchases and production when they have more time. We are now going to explore this distinction between the short run and long run, and in particular what it means for the businesses' ability to vary the size of their operation and facility.
3. How would you represent the cost associated with the factors of production that cannot be varied in the short run? The total cost associated with these fixed inputs is referred to as Total Fixed Cost and mathematically is similar to a constant in the short run. Using the fact that Average Fixed Cost equals Total Fixed Cost divided by the quantity of output, explain how incurring a large fixed or "sunk" cost can be justified if a large amount of output is sold. Provide some examples of businesses and what might be some of their fixed costs. What would graphs of Total Fixed Cost and Average Fixed Cost as a function of output look like?
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