Question

An electricity-generating company confronts the following long-run average total costs associated with alternative plant sizes. It is currently operating at plant size $G$.

a. What is this firm's minimum efficient scale?

b. If damage caused by a powerful hurricane generates a reduction in the firm's plant size from its current size to $B$, would there be a leftward or rightward movement along the firm's long-run average total cost curve?

Short answer

(a) The firm's minimum efficient scale is at plant $E$

(b) The plant size of the firm would be reduced due to powerful hurricane.

Step-by-step solution

Introduction.

The balance point at which a company can produce goods at a competitive price is known as the minimum efficient scale (MES). Obtaining MES reduces the long-run average total cost (LRATC). The MES is the point on a company's long-run average cost curve where economies of scale are exhausted and constant returns begin.

Find the firm's minimum efficient scale (part a).

The tables gives the average total cost of company is as:

Plant size	Average Total cost
$A$	$2000$
$B$	$1800$
$C$	$1600$
$D$	$1550$
$E$	$1500$
$F$	$1500$
$G$	$1500$

According to the above table, the average long-run total cost is at the lowest level at plant size '$E$'. As a result, the minimum efficient scale of the firm is at plant size "$E$ ".

Find the causes by a powerful hurricane (part b).  

Given a reduction in operating plant size, there would be a leftward shift along the long-run average cost curve. Because of the powerful hurricane, the firm's plant size would be reduced.