Homework Answers
(b) Having already produced 12,000 units, the firm would have adopted choice 1, as seen in part a. When producing 12,000 units, the firm would have had an average total cost of $1.67. When output jumps to 22,000 units, the firm cannot alter its choice of fixed cost in the short run, so its average total cost in the short run will be$1.36. However, in the long run, it will adopt choice 2, making its average total cost fall to $1.30.
(c) If the firm believes that the increase in demand is temporary, it should not change its fixed cost from choice1 because choice 2 generates higher average total cost as soon as output falls back to its original quantity of 12,000 units: $1.75 versus $1.67.
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