Question

Consider a situation when $10\%$ increase in all inputs leads to $12\%$ increase in output. How does it impact the average cost? Is it a short period phenomenon or a long period phenomenon?

Answer 1

When $10\%$ increase in all inputs leads to $12\%$ increase in output, unit cost of production $\left(\frac{TC}{Q}\right)$ must decline. Implying a fall in average cost.

It certainly is a long period phenomenon when all inputs are increased. Because, it is only in the long period that all factors are variable factors. In the short period, some factors must be fixed. Accordingly, the possibility of increasing all inputs is ruled out.