In This Problem You Will Demonstrate Your Understanding of the Relationship

Question

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The Answer is See the graph below.
(a) Points to the left of A (the minimum point) on the LRATC curve will be on the downward sloping portion of the curve. To the left of point A, LRATC slopes downward because of economies of scale. Points to the right of point A are on the upward sloping portion of the LRATC curve. To the right of A, LRATC slopes upward because of diseconomies of scale.
(b) Point A is the minimum point for SRATCa. To the left of point A, SRATCa will be downward sloping. The downward slope of that portion of SRATC is a result of declining average fixed cost (AFC) and increasing returns to a variable factor (both of which cause SRATC to fall). The upward sloping portion of the curve (to the right of point A) is upward sloping because of diminishing returns to a variable factor.
(c) SRATCb and SRATCc are not tangent to LRATC at their minimum points. Why? In the short run, at least one input is fixed and its costs are part of average fixed costs. In the long run all costs are variable and all inputs can be changed, allowing for a more efficient (lower cost) combination of inputs.

See the graph below. (a) Points to the left of A (the minimum point) on the LRATC curve will be on the downward sloping portion of the curve. To the left of point A, LRATC slopes downward because of economies of scale. Points to the right of point A are on the upward sloping portion of the LRATC curve. To the right of A, LRATC slopes upward because of diseconomies of scale. (b) Point A is the minimum point for SRATCa. To the left of point A, SRATCa will be downward sloping. The downward slope of that portion of SRATC is a result of declining average fixed cost (AFC) and increasing returns to a variable factor (both of which cause SRATC to fall). The upward sloping portion of the curve (to the right of point A) is upward sloping because of diminishing returns to a variable factor. (c) SRATCb and SRATCc are not tangent to LRATC at their minimum points. Why? In the short run, at least one input is fixed and its costs are part of average fixed costs. In the long run all costs are variable and all inputs can be changed, allowing for a more efficient (lower cost) combination of inputs.

In This Problem You Will Demonstrate Your Understanding of the Relationship

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