The Graph Below Includes Two Plant Sizes as Illustrated by AC₁

question 3

Multiple Choice

The graph below includes two plant sizes as illustrated by AC₁ and AC₂.

-Refer to the graph above to answer this question.Which of the following statements is correct if a firm is operating at point a on AC₁?

• A)The firm has achieved capacity output.
• B)The firm is achieving MES.
• C)An increase in the output would not lower costs.
• D)Building a larger plant would result in lower long-run average cost.
• E)Building a larger plant would not result in lower long-run average cost.

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Definitions:

Abnormal Earnings

Profits that exceed or fall short of the earnings typically expected by the market for a company or industry sector.

Cost Of Equity Capital

The rate of return required by shareholders to compensate for the risk of investing in a company, influencing the company's valuation and capital structure.

Actual Earnings

The actual profit or income generated by a company, reflecting its financial performance over a specific period.

NPVGO

Net Present Value of Growth Opportunities refers to the present value of all future cash flows that a new project is expected to generate after accounting for the initial investment cost.