Answer to Question #267644 in Microeconomics for Katie

Question

A firm estimated its AC curve last year and found that

AC = 1000 – 0.05 Q. This year it estimated its ACs and found that they were

AC = 900 – 0.05 Q

Are there increasing or decreasing returns to scale? 

Answer 1

There is decreasing return to scale. This is because as the production variables (intercept) decrease, the average cost decreases. Assuming $Q$ is constant an increase in inputs (intercept) leads to a increase in average cost.