Make another column labeled \"LRATC\" that includes three points: 2003\'s SRATC

Question

Make another column labeled "LRATC" that includes three points: 2003's SRATC when Q=2Q=2; 2014's SRATC when Q=8Q=8, and 2008's SRATC when Q=17Q=17. 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=6Q248Q+147LRATC=6Q248Q+147. 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. 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.

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

d. 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.

Explanation / Answer

The answer is C.

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

Reason: the reason follows from a simple production function where a horizontal summation of SRATC curves and corresponding output gives us an output that is higher than the Short run whereas, due to the economies of scale the LRATC will be lower than that of the short run average cost.

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