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14 September, 12:15

Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing (constant, decreasing, increasing, increasing then decreasing, decreasing then increasing) returns to scale?

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  1. 14 September, 12:42
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    increasing then decreasing

    Explanation:

    production level total cost average total cost

    4,000 $8,000 $2.00

    4,200 $8,200 $1.95

    4,400 $8,800 $2.00

    Returns to scale measure the change in productivity, or how much input is needed to produce a unit of output.

    increasing returns to scale: output increases in a greater proportion than inputs constant returns to scale: output increases in the same proportion as inputs decreasing returns to scale: output increases in a lower proportion than inputs

    Since first the average total cost decreased, total output increased in a greater proportion than inputs ⇒ increasing returns of scale. But then the situation reversed and total output increased in a lower proportion than inputs ⇒ decreasing returns of scale.
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