Answer to Question #176202 in Microeconomics for Ali

Question

Q2.b. Suppose a firm has only three possible plant size options as shown in the accompanying figure. What plant size will the firm choose in producing (i) 50, (ii) 130, (iii) 160, and (iv) 250 units of output?

(v) Draw the firm’s long-run average cost curve on the diagram and describe this curve.

 

Answer 1

The firm should choose such plant size, for which P = MR = MC. We need additional information mentioned above to calculate this equilibrium point.

(v) The firm’s long-run average cost curve (LAC) is a bowed-in curve, it shows the long-run optimal production point in its minimum point, at which P = MC = min LAC.