Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing (constant, decreasing, increasing, increasing then decreasing, decreasing then increasing) returns to scale?

Question

Business

Ethan Huang

2 June, 05:40

Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing (constant, decreasing, increasing, increasing then decreasing, decreasing then increasing) returns to scale?

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Answers (1)

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Leroy Arias · Answer 1

increasing then decreasing

Explanation:

production level total cost average total cost

4,000 $8,000 $2.00

4,200 $8,200 $1.95

4,400 $8,800 $2.00

Returns to scale measure the change in productivity, or how much input is needed to produce a unit of output.

increasing returns to scale: output increases in a greater proportion than inputs constant returns to scale: output increases in the same proportion as inputs decreasing returns to scale: output increases in a lower proportion than inputs

Since first the average total cost decreased, total output increased in a greater proportion than inputs ⇒ increasing returns of scale. But then the situation reversed and total output increased in a lower proportion than inputs ⇒ decreasing returns of scale.