Question

How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect the long-run average cost curve of a firm? Can you draw the old curve and the new one on the same axes? How might such an improvement affect other firms in the industry?

Short answer

The LRAC shifts lower when there is a technological advancement. In the same axes, a new curve can be drawn. Other businesses' production costs will decrease as a result of technical advancements.

Step-by-step solution

Step 1. Introduction

When all inputs are variable, a business's Long Run Average Cost (LRAC) curve displays the minimum average total cost of production at which the firm can produce any given level of output in the long run.

Step 2. Explanation

Because of technical advancements, the per unit cost of manufacturing for all levels of output decreases, and the LRAC moves from $LRA{C}_1$ to $LRA{C}_2$. Despite technical advancements, the new average cost curve can be created using the same axes because the unit of measurement for cost and production stays the same. All other enterprises in the industry will see a downward change in their production costs as a result of technical advancements.