Question

Table 1 shows the three short-run average total cost (ATC) curves for a firm with only three possible plant sizes: (1) Size 1, (2) Size 2, and (3) Size 3. Find the firm's long-run average cost (LRAC) curve and answer Questions 17- 21 on the basis of the information in Table 1 Table 1 Only Three Possible Plant Sizes Long-Run Average Cost Curve LRAC Size 1 Size 2 QI ATC 20 S0.95 30 40 50 60 70 Size 3 Size QI ATC QI ATC 10 20 30 40 50 60 70 80 90 40 $1.00 10S1.00 0.90 0.85 0.88 0.93 1.05 20 30 40 0.80 0.76 0.79 0.83 0.90 60 70 80 90 0.87 0.84 0.80 0.95 1.05 60 17. In the long run, if the firm produced 40 units, it would use Plant Size A. 1; S0.88 B. 2; S0.76 C. 3; $1.00 D. The answer is indeterminate based on the information given. 18. In the long run, if the firm produced 70 units, it would use Plant Size A. 1; $1.05 B. 2; $0.90 C. 3 S0.80 D. The answer is indeterminate based on the information given. 19. Long-run average cost is minimized and the average cost per unit would equal and the average cost per unit would equal with an output of units using Plant Size A. S0.85; 30;1 B. S0.76; 40:2 C. S0.80; 70 3 20. In the long run, the firm would use Plant Size A. The answer is indeterminate based on the information given. to produce either 10 or 20 units, it will use Plant Size 1; 3; 2 and for output greater than 40 units the firm experiences D. 0 produce 30, 40, 50 or 60 units, and it will use plant Size 1; 2; 3 to produce 70, 80, or 90 units. B. 3; 2; 1 С. 3:1,2 D. E. 2; 1; 3 21. Between 0 and 40 units the firm experiences A. increasing marginal product; decreasing marginal product B. decreasing marginal product; increasing marginal product C. diseconomies of scale; economies of scale D. economies of scale; diseconomies of scale

Answer 1

Ans 17 Option B because if firm produces 40 units then it will use plant size 2 because this plant size has minimum average cost i.e.$ 0.76.

Ans 18 Option C because if firm produced 70 units, then it will use plant size 3 because this plant size has minimum average cost i.e. $0.80.

Ans 19 Option B because $0.76 is the minimum average cost at the 40 units of output and using plant size 2.

Ans 20 Option A because plant size 1 is suitable for 10 to 30 level of output because it has minimum average cost to produce this level of output. Plant size 2 is suitable to produce 30 40 50 60 level of output because it has minimum average cost. Similarly plant size 3 is suitable to produce 60 70 80 level of output because it has minimum average cost.

Ans 21 Option A is correct because initially marginal product increases so average cost is decreasing between 0 to 40 units of output. Beyond 40 units of output, marginal product starts declining so due to this average cost is increasing.