Question

Suppose a firm is operating at the minimum point of its short run ATC curve, so that MC=ATC. Under what circumstances would it choose to alter the size of its plant? Explain.

Answer 1

The marginal cost is the additional cost incurred from producing an extra unit of the commodity and the average cost is the total cost per unit. When the MC is smaller than AC, ac decreases and similarly when MC is above the AC, the AC increases. In this situation the plant would alter the plant size if the margianl cost is smaller than the average cost. If the firm is operating under the minimum point of the ATC, that is MC=ATC ,there is no need for any further plant expansion. If the marginal cost is greater than the averge cost the plant must decerase the size of the plant.