Do statements about "returns to scale" refer to the long run or the short run average cost curves? If returns to scale are increasing, what does this imply about the average cost? If entry of new firms lowers average cost of existing firms, what does this imply about returns to scale and external economies of scale? Joon's Microeconomic Advisors Inc

Returns to Scale refers to the change in output followed by a change in the inputs in which all factor inputs are variable. Hence, ?Returns to Scale? refers to the long-run average cost curve. It is because returns to scale also include the returns of the technology and plant which are considered as fixed in the short run.

If returns to scale are increasing, then it would imply the lowest levels of average cost because the increase in output has a larger extent than an increase in the input levels which specifies the lowest cost of per unit.

The entry of new firms brings the increasing returns to scale in the production process as it brings a larger amount of output as compared to the units of inputs used in the production. It serves as a mechanism of lower average cost because of external economies of scale because the increasing number of firms in the industry bring the span of increasing production and specialization, better training avenues for workers and reduce the cost of doing business.

Joon's Microeconomic Advisors Inc. produces economic? consulting. They only input in producing economic is the labor of economists who are paid $1000 per day. Assume that the marginal product of economists working for Joon, measured in pages of consulting reports per day, is given by the equation MPL=20?0.5LMPL=20?0.5L, where L is labor in days. If the price of a page of economic consulting is $400, Joon will hire 35 days of economic labor? Show your work.

Joon will hire the days of labor until the point of equality of the marginal revenue product of labor and the marginal cost of hiring additional labor day.

Hence, the marginal revenue product is determined by

MRP=MR×MPMRP=400×(20−0.5L)MRP=8000−200LMRP=MR×MPMRP=400×(20−0.5L)MRP=8000−200L

Price serves as the value of the marginal revenue.

The hiring of labor will occur until

MRP=MC8000−200L=1000200L=7000L=35MRP=MC8000−200L=1000200L=7000L=35

The firm will hire 35 days of labor.