The manager of TXU is in charge of determining the optimal size of 2 electricity
ID: 1191548 • Letter: T
Question
The manager of TXU is in charge of determining the optimal size of 2 electricity generating facilities. The figure shows the short-run average total cost curves associated with different facility sizes: small, medium, or large (S, M, or L). Demand projections indicate that 6 million kilowatts must be produced at the South Texas facility, and 2 million kilowatts must be produced at the Texas Panhandle facility.
Which of the following is true?
A. The small facility has increasing returns to scale when it produces at any level above 2 million kilowatts per hour.
B. The manager should choose a small-sized facility for South Texas.
C. The manager should choose a large-sized facility for the Panhandle.
D. The small facility does not have increasing returns to scale for any level of output.
E. The medium facility has decreasing returns to scale when it produces at any level above 3 million kilowatts per hour.
Explanation / Answer
The small facility has increasing returns to scale when it produces at any level above 2 million kilowatts per hour.
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