plus.pearson.com Week 4 Assignment (19 567 non lus) - harding218... Free Grammar Checker (OnHi!. Q&A 6.4 What is the shape of the long-run cost function for a fixed-proportion production function (see Chapter 50) in which it takes one unit of labor and one unit of capital to produce one unit of output? What is the shape of the average cost curve? Does it have economies or diseconomies of scale? Answer 1. Because no substitution is possible with a fixed-proportion production function, multiply the inputs (= the number of units of output) by their prices, and sum to determine total cost. The long-run cost of producing q units of output is C(q) = wL = rK = wq + rq = (w + r)q. Cost rises in proportion to output. The long-run cost curve is a straight line with a slope of w + r. 2. Divide the total cost function by q to get the average cost function. The average cost function is AC(q) = C(q)/q = [(w + r)al/q = w + r. Because the average cost for any quantity is w + r, the average cost curve is a horizontal straight line at w + r. Moreover, because the average cost does not change when the quantity of output changes, the cost function has constant costs: it does not have either economies or diseconomies of scale. MacBook Air O1 2 #plus.pearson.com Week 4 Assignment (19 567 non lus) - harding218... Free Grammar Checker (Onli. P Questions - I ' Mini-Case Economies of Scale at Google Google has become a leader in data storage, offering access to what it calls Google Cloud Storage. People access their data from Google's massive data storage devices using the internet, as though from a cloud in the sky. By operating at a gigantic size and using a new approach, Google is able to lower its average cost and achieve economies of scale In the past, a firm would buy as many large hard disk units as it needed. Once the firm was buying the largest possible unit, to get more storage it would just buy more such hard disk units and its costs would rise in proportion to the number of units it needed. Rather than buying off-the-shelf completed hard-disk units, Google buys raw computer parts in massive quantities, and assembles custom units on open racks without unnecessary components such as individual cases and fans. Google automatically backs up data on multiple hard disks. Thus, when a disk fails, a worker quickly yanks it out and replaces it with a new unit without spending time on a tedious manual backup. By sharing cooling and labor costs over many units, it lowers its average cost of storing data. MacBook Air *