The following depicts the long run average cost curve (LRAC). SRAC represents the short run average costs and SRMC represent the short run marginal costs.

1. From “Scale 1” to “Scale 3”, what will be your interpretation of the returns to scale for this firm?

2. For firms producing at Scale 1 indicate the optimal long-run production point. Explain why no other production/quantity point on the Scale 1 SRAC would be optimal in the long run.

3. What is the optimal, most efficient, production point? Explain

4. At what plant scale and production quantity will you predict a perfectly competitive firm to be operating at in the long run? Explain.

5. At what plant scale and production quantity will you predict an imperfectly competitive firm to be operating at in the long run (answer in a general way relative to the perfect competitor answer)? Explain. 

 

Costs ($) Scale 1 SRMC 50,000 SRAC Scale 2 SRMC 100,000 SRAC Scale 3 SRMC 150,000 SRAC LRAC Output