A firm experiences a sudden increase in the demand for its product. In the short run, it must operate longer hours and pay higher overtime wage rates to satisfy this new demand. In the long run, the firm can install more machines instead of operating fewer machines for longer hours. Which do you think will be lower, the short-run or the long-run average cost of the increased output? How is your answer affected by the fact that the long-run average cost includes the new machines the firm buys, whereas the short-run average cost includes no machine purchases?
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