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Microeconomics Question from Walter E. Williams:Edit

Assuming an ordinary-shaped long-run average-cost curve in advance of any "fixed-cost" commitment (a so-called "planning curve"), indicate the shape of the relevant average-cost after such a commitment:

  • (a) If the "fixed costs" were expended to purchase durable inputs that were perfectly unspecialized to the firm.
  • (b) If they were expended to purchase inputs that were perfectly specialized. Justify and explain. Do not consider Alchian "volume-effects", or transition and costs (haste premiums).

AnswerEdit

39a
  • (a) If the durable inputs are perfectly unspecialized (warehouse?), then adding these inputs will have no effect on the firm’s technical efficiency and thus will not reduce the firm’s original cost (AVC). The Average Total Cost curve (the AC curve after such a commitment) will lie above the original average cost curve because an addition to Fixed costs will push up average costs.
39b
  • (b) If the durable inputs are perfectly specialized to the firm, adding these inputs will increase the other inputs’ productivity and reduce costs.

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