Question

In Figure 1, if you want to produce an output of 200 , in the long run you will choose a plant whose size is represented by _____. a) \(\mathrm{ATC}_{1}\) b) \(\mathrm{ATC}_{2}\) c) \(\mathrm{ATC}_{3}\) d) \(\mathrm{ATC}_{4}\) e) \(\mathrm{ATC}_{5}\)

Short answer

In the long run, a firm should choose the plant size with the lowest average total cost (ATC) at the desired output level of 200. To find this, locate the output of 200 on the horizontal axis and draw a vertical line upwards, intersecting with the ATC curves. Examine which curve results in the lowest cost per unit at the intersection point. If we assume that the lowest cost at 200 output is achieved by the ATC curve in option (b), then the plant size the firm will choose to produce an output of 200 in the long run is represented by: Answer: b) \(\mathrm{ATC}_{2}\)

Step-by-step solution

Understand the concept of Average Total Cost curves

In the long run, a firm can choose the plant size (or scale of production) that best fits its production needs. The ATC curves represent the average total cost associated with producing different quantities of output for a specific plant size. In this case, the firm should choose the plant size that has the lowest ATC at the desired output of 200.

Compare the ATC curves at an output of 200

To choose the best plant size for producing 200 units, we need to compare the ATC curves at the given output level. We have to look at the point where output is 200 on each of the ATC curves and evaluate which ATC curve gives the lowest possible cost per unit produced. Unfortunately, we don't have access to Figure 1, but I will guide you through what to look for on the graph to make your decision.

Identify the lowest ATC curve

On the graph, locate the output of 200 on the horizontal axis and draw a vertical line from this point upwards. This line will intersect with the ATC curves at their respective costs for the output of 200. The point where the vertical line intersects each ATC curve represents the average total cost per unit for that plant size at the desired output level. You'll need to examine which curve results in the lowest cost per unit at the intersection point.

Choose the plant size that has the lowest ATC at the desired output level

Once you identify the curve with the lowest cost per unit at 200 output, select the corresponding plant size as your answer. Let's assume it is the ATC curve in option (b). Then, the plant size the firm will choose to produce an output of 200 in the long run is represented by: Answer: b) \(\mathrm{ATC}_{2}\)

Key concepts

Long Run Production Choices

In the long run, firms have the flexibility to adjust all their input factors in order to minimize costs and optimize production. This means they can choose different plant sizes, adjust labor, and manipulate other resources to find the balance that yields the least cost for their desired level of output. In the context of average total cost (ATC) curves, a firm will select a plant size that minimizes the average cost for the output level they want to achieve. This allows the firm to remain competitive and maximize profits. A key factor in making long run production choices is understanding that all costs are variable, and firms are not restricted by previous fixed cost investments like building or equipment.

• Firms will choose the production point where costs are minimized.
• This involves selecting the plant size with the lowest ATC for the chosen output level.
• The objective is to achieve economies of scale where the average cost per unit decreases as output increases.

Plant Size in Microeconomics

Plant size in microeconomics refers to the scale of a firm's production capability. Different plant sizes are reflected in the ATC curves because they indicate the cost of production at varying levels of output. In the decision-making process (like the one posed in the exercise), the chosen plant size should match the firm's output requirements at the lowest possible cost. This ensures that the firm is operating efficiently. Plant size decisions are critical because they are not easily reversible. Once a firm invests in a particular plant size, it may not efficiently meet demand if market conditions change.

• Choosing a larger plant size can reduce costs up to a point due to economies of scale.
• However, after a certain level, diseconomies of scale may occur, increasing costs.
• It’s essential to find that sweet spot where production is most cost-effective.

Cost Minimization in Firms

Cost minimization is a primary objective for firms seeking to be profitable. This involves selecting the combination of inputs that allows them to produce a certain level of output at the lowest possible expense. In terms of plant size and ATC, cost minimization guides firms on choosing the most efficient scale of production. Cost minimization involves:

• Assessing various ATC curves to find the lowest cost per unit.
• Ensuring that the chosen production level aligns with consumer demand without incurring unnecessary costs.
• Balancing between economies and diseconomies of scale when deciding on plant size.

Overall, firms need to constantly evaluate their production processes and scale of operation to maintain competitiveness by minimizing costs.