You are currently operating in the short run producing 2,000 units of output per

Question

You are currently operating in the short run producing 2,000 units of output per month. When you started in business 10 years ago, you bought machinery and designed your operations under the expectation that the demand for your product would be 1,500 units per month. If you have not changed anything about your operations since you began in business and input prices have not changed:

a.       You must currently be hiring more labor than you use to.

b.      Your short run total cost is higher than your minimum long run total cost.

c.       Your average fixed cost has gone down.

d.      All of the above.

Explanation / Answer

d. All of the Above

As, firm is producing more than its long run output, so it will be hiring more labour, thus also its cost will be higher than long run minimum, and thus as more of labour is hired and more investment is done on machinery, so AVC will go down.

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