Question

You work for a company that is being accused of monopoly behavior, given its large size. Comparisons are made to the industry standard, where each establishment has on average about 16.3 employees. Your company is bigger than that, but you want to provide evidence against the monopoly charges.

You’ve collected data at different times in your company’s history, when you had different amounts of capital.
In 2012, SRATC=17Q2−2,200Q+100,000

In 2015, SRATC=37Q2−1,500Q+55,000

In 2018, SRATC=20Q2−2,000Q+75,000

1.

After plotting these three different SRATC curves (have QQ go from 0 to 100 in units of 5; make the maximum on the vertical axis be 100,000), what do you notice about how your company's size and costs have changed as time has gone on?

Select one:

a. The firm was smallest in 2012 and had medium costs; was largest in 2018 and had the lowest costs; and was a medium size but had the highest costs in 2015.

b. At the beginning of the period, the firm was smallest but enjoyed the lowest costs. By the end of the period, the firm had expanded to its largest size and also had its highest costs.

c. In 2012, the firm was relatively large with medium costs. In 2015, the firm was much smaller, but costs were even higher than in 2012. In 2018, the firm settled into a medium size and had the lowest costs of any of the years.

d. The firm contracted in size as time went on, but had increased costs as well.

2.

Question text

Make another column labeled “LRATC” that includes three points: 2015’s SRATC when Q=5; 2018’s SRATC when Q=50, and 2012’s SRATC when Q=85. Plot a 2nd-degree polynomial trendline to represent your company’s LRATC.
In a more competitive industry with smaller firms, typical LRATC curves follow LRATC=12Q2−250Q+30,000. Using all available information in this question, which would be a good argument that could be used to justify your company’s size?

Select one:

a. While our costs are higher than competitive firms, we are actually smaller in scale than they are. The total cost (high per unit cost but low output) for our firm is actually less than for smaller firms.

b. Our firm's costs may be higher than smaller firms, but our optimal output far exceeds theirs. The improvement in volume compensates for the slightly higher costs.

c. Even though the LRATC curves look different, the minimum points, and the optimal output associated with them, are actually equivalent. Thus, there is no qualitative difference between our firm's efficiency and that of smaller firms.

d. Smaller firms have their minimum average total cost at a low amount of output, but our minimum average total cost is actually even lower than theirs, even though it occurs at a higher amount of output.

Answer 1

1. Please see the below graph:

I think (a) seems to be the most convincing answer here: The firm was smallest in 2012 and had medium costs; was largest in 2018 and had the lowest costs; and was a medium size but had the highest costs in 2015.

2 Decreasing Trendline for LRATC.
Cannot decide which should be correct, let's discuss in comments?