7.3 Long-Run Costs

In the long run, a firm adjusts all its inputs to keep its cost of production as low as possible. The firm can change its plant size, design and build new equipment, and otherwise adjust inputs that were fixed in the short run.

Although firms may incur fixed costs in the long run, these fixed costs are avoidable rather than sunk costs, as in the short run. The rent of F per month paid by a restaurant is a fixed cost because it does not vary with the number of meals (output) served. In the short run, this fixed cost is also a sunk cost: The firm must pay F even if the restaurant does not operate. In the long run, this fixed cost is avoidable: The firm does not have to pay the rent if it shuts down. The long run is determined ...

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