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ECO402 Microeconomics GDB Fall 2020 Solution / Discussion

GDB Topic: Majid Clothing Limited is a garment factory. It produces leather jackets in winter and cotton t-shirts in summer. Hence it operates around the whole year, without any specific production gaps. It’s pertinent to mention that like many other large garment units, the Majid Clothing Limited has also taken loan from the bank to run its business smoothly per the loan agreement, Majid Clothing Limited has a lease on its building and equipment. There are certain fixed and variable factors of production, which have been used by the Majid Clothing Limited for the process of production. During the period of the lease, Majid Clothing Limited’s capital is its fixed factor of production. Majid Clothing Limited’s variable factors of production include things such as labor, raw cloths, and electricity. As per the book, keeping in view the microeconomic analysis, we shall simplify the scenario by assuming that labor is only variable factor of production of this factory. It can be concluded that Majid Clothing Limited can obtain different levels of output (total product of the firm) with varying amounts of labor, keeping a given level of capital.

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Solution:

 

Short Run

  • A firm is said to be in its short run when it can increase its output by utilizing more of variable factors, such as by hiring more workers, but not by increasing its fixed factors. [Capital, land or entrepreneur].

Long Run

  • A firm enters its long run when it increases its scale of operations/production capacity. Increasing scale means that no factor of production is fixed and all are variable.

 

  • As stated in this scenario, all the factor of production are fixed except labor this firm is operating in Short Run.

Justification

  • As per scenario, capital is fixed because of lease agreement and bank loan so size of the factory & machinery [both are capital] are fixed and production capacity cannot be expanded/altered so it is the short run scenario.

 

  • For Majid clothing limited, a long-run can be defined as a period when the firm will no longer be under lease agreement and would be able to expand its capital and production.

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