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1)A firm is producing at the minimum average total cost with its current plant
1)A firm is producing at the minimum average total cost with its current plant.
Draw the firm's long-run average cost curve. Label it.
Draw a point on the LRAC curve at which the firm can lower its average total cost by increasing its plant.
Draw the firm's short-run average total cost curve that is consistent with the point you have drawn. Label it.
When the firm can lower its average total cost by increasing its' plant, then it is operating at a point on its' long-run average cost curve with _____.
A. constant returns to scale
B. diseconomies of scale
C. economies of scale
Expert Solution
A typical long-run average cost curve (LRATC) faced by a firm is depicted in the file attached below.
In the attached figure at point A, the producer can lower its average total cost level by increasing its production level until point B is achieved.
Point A can be achieved When the producer achieve the minimum level at the short-run average cost curve 2 (SRATC2).
The correct option is option B i.e. Diseconomies of scale. As at point A the producer can achieve a lower average total cost level by altering its function decision and therefore such a production level depicts diseconomies of scale.
please see the attached file for the complete solution.
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