True or False? Explain your reasoning.
a. The short-run average total cost can never be less than the long-run average total cost.
b. The short-run average variable cost can never be less than the long-run average total cost.
c. In the long run, choosing a higher level of fixed cost shifts the long-run average total cost curve upward.
a. False. In the short run, a firm may have fixed costs that cannot be adjusted. As a result, the short-run average total cost includes these fixed costs, which can be spread over a smaller quantity of output. In comparison, in the long run, a firm has the flexibility to adjust all input quantities, including fixed costs, allowing for a more efficient allocation of resources. Therefore, the long-run average total cost can be lower than the short-run average total cost.
b. True. The short-run average variable cost includes only variable costs, which can be adjusted in the short run. On the other hand, the long-run average total cost includes both fixed and variable costs. Since the long-run average total cost accounts for more costs, it is likely to be equal to or greater than the short-run average variable cost.
c. False. The decision to choose a higher level of fixed costs does not shift the long-run average total cost curve upward by itself. The long-run average total cost curve represents the lowest possible average total cost for each level of output given the firm's technology and input prices. Increasing fixed costs might impact the shape of the curve, but it does not necessarily shift it upward. The shape and position of the curve depend on various factors such as economies of scale, input prices, and technology.
a. True. To understand why the short-run average total cost can never be less than the long-run average total cost, we need to consider the definitions of these cost concepts. The short-run average total cost includes both fixed costs and variable costs, while the long-run average total cost only includes variable costs. In the short run, there are fixed costs that cannot be adjusted, which can lead to higher average total costs compared to the long run when all costs are variable and can be adjusted to achieve more efficient production. Therefore, the short-run average total cost can never be less than the long-run average total cost.
b. True. The short-run average variable cost includes only the variable costs per unit of output, while the long-run average total cost includes both fixed and variable costs per unit of output. Since the long-run average total cost takes into account all costs, including fixed costs, it will always be equal to or greater than the short-run average variable cost, which only considers variable costs. Therefore, the short-run average variable cost can never be less than the long-run average total cost.
c. False. Choosing a higher level of fixed cost does not necessarily shift the long-run average total cost curve upward. In fact, the level of fixed cost has no direct effect on the shape or position of the long-run average total cost curve. The long-run average total cost curve is determined by economies of scale, diseconomies of scale, and constant returns to scale, which are related to the efficiency of production as a whole. Changes in fixed cost will only result in shifts along the long-run average total cost curve, not shifts in its position.