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 increasing returns to scale since there is decrease in AC. This can be clearly seen from the graph there is decrease in Average unit cost from the last year.