Question

10. Long-run cost relationships

The following graph shows the short-run average total cost curves and the long-run average total cost curve for a publishing firm. The five marked quantities indicate points of tangency between each short-run average total cost curve (SRATC$\mathit{SRATC}$) and the long-run average total cost curve (LRATC$\mathit{LRATC}$); for example, Q1${\mathit{Q}}_1$ marks the point of tangency between SRATC1${\mathit{SRATC}}_1$ and LRATC$\mathit{LRATC}$.

The orange point on SRATC2${\mathit{SRATC}}_2$ indicates the firm's current output level in the short run (Q1${\mathit{Q}}_1$).

In the long run, if the firm decides to keep output at its initial level, what will it likely do?

Shut down

Shift to operate on SRATC1${\mathit{SRATC}}_1$

Shift to operate on SRATC4${\mathit{SRATC}}_4$

Stay on SRATC2${\mathit{SRATC}}_2$ but increase to the point touching LRATC$\mathit{LRATC}$

Over which range of output levels do you find diseconomies of scale?

Q2${\mathit{Q}}_2$ to Q4${\mathit{Q}}_4$

0 to Q1${\mathit{Q}}_1$

0 to Q3${\mathit{Q}}_3$

0 to Q5${\mathit{Q}}_5$

Greater than Q3