Question

7. Long-run average cost curves The following graph shows the short-run average total cost curves and...

7. Long-run average cost curves

The following graph shows the short-run average total cost curves and the long-run average cost curve for a publishing firm. The five marked quantities indicate points of tangency between each short-run average total cost curve (SRATCSRATC) and the long-run average cost curve (LRACLRAC); for example, Q1Q1 marks the point of tangency between SRATC1SRATC1 and LRACLRAC.

The orange point on SRATC1SRATC1 indicates the firm's current output level in the short run (Q2Q2).

COST PER UNITQUANTITY OF OUTPUTSRATC1Q1SRATC2Q2SRATC3Q3SRATC4Q4SRATC5Q5LRAC

In the long run, if the firm decides to keep output at its initial level, what will it likely do?

Shut down

Stay on SRATC1SRATC1 but decrease to the point touching LRACLRAC

Shift to operate on SRATC2SRATC2

Shift to operate on SRATC3SRATC3

At which output level (or range of output levels) is this firm operating at the ideal plant size? Assuming that it cannot change it’s current cost curve.

Q3Q3

Q2Q2

0 to Q3Q3

Q2Q2 to Q4Q4

Q4

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