Explain with examples the reasoning behind the positive slope of ...

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Explain with examples the reasoning behind the positive slope of the LRAC curve at higher levels of output.

Question 2

Suppose a firm in a perfectly competitive market is operating at its profit-maximizing level of output. Will the firm suspend operations if it faces a reduction in the price it can charge for its product?
 a. No, because it can always raise its prices in the short run.
  b. No, because it can always raise its prices in the long run.
  c. No, as long as the firm earns sufficient revenue to pay all of the variable costs.
  d. Yes, since it never makes sense to operate at a loss, even in the short run.
  e. No, because it always makes sense to operate at a loss, even in the long run.

[ashely1112]

Answer to Question 1

According to economist Alfred Marshall, LRAC curves reach a minimum and then turn upward because larger firms place such demands on management that even the most talented executives eventually lose their ability to control costs. Marshall reasoned that a single manager or a small group of them would ultimately be unable to monitor the performance of a large workforce or to efficiently coordinate the many different activities that take place in a large firm. Marshall thought that even managers who delegate some decisions to subordinates would have problems communicating with them and motivating them to make decisions that benefit the firm's owners.

For example, very few top-tier gourmet restaurants, for instance, operate in more than one or two venues. Their success or failure depends on constantly monitoring the quality of ingredients and operations in the kitchen, and authority over details like these is difficult to put into the hands of more than one person. In practice, a financier often bankrolls a chef and gives the chef final authority over all food-related decisions. By contrast, fast-food outlets are better viewed as factories than as restaurants. Franchising puts decisions about purchasing, advertising, and menu items in the hands of a parent company, leaving local operators the job of assembling these ingredients in standardized ways and keeping their stores clean. The fact that New York City contains hundreds of McDonald's while renowned chef Daniel Boulud has only a single outlet reflects the difficulties of managing the latter. On the other hand, prestige steak houses, like Morton's and Ruth's Chris, operate nationally and are mostly franchises. Their simple recipes facilitate quality control and their standardized menus allow the parent companies to buy ingredients of uniform quality for all of their outlets.

Answer to Question 2

c

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TYSM

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