11. Suppose a firm has only three possible plant-size options, represented by the?

Question

AC curves shown in the accompanying figure. What plant size will he firm choose in producing (a) 50, (b) 130, (c ) 160, (d) 250 units of output? Draw the firm’s long -run average-cost curve on the diagram and describe this curve.

Answer 1

(The graph is in the link below.)

(a) To produce 50 units, the firm will choose plant size #1, since its ATC is lower for this size firm in producing less than 80 units.

(b) To produce 130 units, the firm will choose plant size #2, since its ATC is lower for size #2 in producing between 80 and 240 units.

(c) To produce 160 units, the firm will choose plant size #2, since its ATC is lowest for producing between 80 and 240 units.

(d) To produce 250 units, the firm will choose plant size #3, since its ATC is lowest for production of more than 240 units.

The long-run average-cost curve drawn on this diagram would trace ATC1 as far as 80 units, then ATC2 between 80 and 240 units, then finally trace ATC3 from 240 units to the end of the graph.