Question

During the class/online lecture Professor Ed Torres mentioned that in the real world most U.S. firms are operationg along the Diseconomies of Scale portion of the Long-Run Average Total Cost (LRATC) curve. What does this mean?

Multiple Choice

• Theorectically the Long-Run Average Total Cost (LRATC) curve is drawn as upward sloping.  

• As the industry expands production and as more firms enter the industry, then logically they will be competiing for the inputs (i.e. talented labor, raw materials) that are necessary for production.  

• As new firms enter the industry, they will bid up the input resource prices (e.g. talented labor, materials) and will therefore increase the per-unit costs.   

• All statements listed are true and correct.

Answer 1

Answer to the question:

Option d: All statements listed are true and correct.

Explanation: The increasing input price is a source of the diseconomies of scale. In the long run, new firms enter into the market and demand for input increases, this increased demand will trigger the price of the input to go up. This ultimately causes cost of production of the firms to go up and the Long run average cost (LAC) starts rising.

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