Question

The graph below illustrates a series of short-run average cost curves, numbered AC through AC4, which correspond to the only four different automobile plant sizes possible. AC, AC, AC, AC 10000 8000 6000 4000 2000 100 200 300 400 500 600 Quantity of autos per day

a. What can you say about returns to scale?

options are: constant returns   increasing returns   decreasing returns  

b. Are economies of scale present?

        Yes or No  

c. If, in this automobile plant, it takes 32 workers and 92 units of capital to produce 200 automobiles a day, how much labour and capital is involved in producing 300 automobiles a day?

_______ workers and _______ units of capital

Answer 1

Answer
a)
Constant return
The minimum average total cost on any curve is $4000 means the long run AC is flat or horizontal at AC=4000 and it is constant return as the average cost is the same at each level of output.

b)
in the long run,
Decreasing AC means the economics of scale and increasing means diseconomies of scale

So there no economics of scale as it is a constant return to scale

c)
The inputs will be in proportion as the output is having constant return to scale
so 200 in L=32 and K=92 then 100 in L=16 and K=46
so for 300 L=48 and K=138
48 workers and 138 units of capital