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Homework answers / question archive / Assume that firms A and B have the same minimum efficient scale of operation and, at current production levels, both firms are incurring the same average costs of production
Assume that firms A and B have the same minimum efficient scale of operation and, at current production levels, both firms are incurring the same average costs of production. However, firm A's output is 5 times larger than firm B's output.
How is this possible?
The formula for finding average total cost is to take total cost and divide it by quantity. This means that the ratio of total cost to quantity is the same for all firms with the same cost curve, but the actual numbers may vary. It is possible for firms A and B to have the same minimum efficient scale and average total cost curve but for firm A to produce 5 times more if firm A's factory is five times bigger.
For example, let's say that the minimum efficient scale is $10 per unit. If firm A is producing 100 units it would have a total cost of $1,000 because
[Math Processing Error]ATC=TC/Q
[Math Processing Error]ATC=1000/100
[Math Processing Error]ATC=10
If firm B is producing 5 times less than firm A, they are producing 20 units. For them to still have a minimum efficient scale of $10, their total cost would have to be $200. This would give them the same minimum ATC.
