Question

Size 1 Output ATC 10 $1.10 20 1.00 30 0.95 40 0.98 50 1.03 60 1.15 Size 2 Output ATC 20 $1.05 30 0.90 40 0.86 50 0.813 60 0.93 70 1.00 Size 3 Output ATC 40 $1.10 50 0.97 60 0.94 70 0.90 80 1.05 90 1.15 a. Use this information to set up a table showing the output levels and the ATC (Average Total Cost) amounts needed to draw the long-run average cost schedule (LRATC). (3pts.) b. Draw a graph showing the three possible plant sizes, using the three different ATC values on the same graph. (5pts.) c. Draw the LRATC, based on your results, on a new graph. (4pts.)

Answer 1

Answer:

(a) The Long Run Total Cost refers to the lowest cost of producing a good at each level of output and firms build the most appropriate plant to produce the most efficient level of output.

The Long Run Average Cost Schedule (LRATC) is determined by the lease cost of producing a good at each level of output from all the three plant sizes.

The LRATC Schedule is as under:

Output	LRATC
10	$1.10
20	$1.00
30	$0.90
40	$0.86
50	$0.89
60	$0.93
70	$0.90
80	$1.05
90	$1.15

(b) The required graph showing the three possible plant sizes, using the three different ATC values on the same graph is as under:

Output	Plant Size 1 ATC	Output	Plant Size 2 ATC	Output	Plant Size 3 ATC
10	$1.10	20	$1.05	40	$1.10
20	$1.00	30	$0.90	50	$0.97
30	$0.95	40	$0.86	60	$0.94
40	$0.98	50	$0.89	70	$0.90
50	$1.03	60	$0.93	80	$1.05
60	$1.15	70	$1.00	90	$1.15

$1.40 $1.20 $1.00 $0.80 ATC $0.60 $0.40 $0.20 $0.00 0 10 20 30 40 50 60 70 80 90 100 Output Plant Size 1 ATC Plant Size 2 ATC Plant Size 3 ATC

(c) The LRATC graph based on the results above is as under:

LRATC $1.40 $1.20 $1.00 $0.80 ATC $0.60 $0.40 $0.20 $0.00 0 20 40 60 80 100 Output