Long Run Costs

Here is a table which shows out-

put and short run average cost for each of 3 plant sizes.Let’s say that plant size one is a small plant, size two is a normal plant, and size three is a gigantic plant.For each method it is assumed that there is a given-sized plant and that variable inputs are increased to raise the output from one level to the next.

The table shows how increasing the capital input (plant) may lead to economies of scale, and eventually, diseconomies of scale.Look carefully at each column and compare the different methods against each other. 

Output
Method 1
Method 2
Method 3
100
10.00
13.00
17.00
200
9.00
11.50
14.30
300
8.50
9.75
12.50
400
8.30
8.40
10.80
500
8.40
8.10
9.60
600
8.90
7.50
8.60
700
9.60
7.30
8.10
800
11.70
7.60
7.80
900
14.80
8.10
8.00
1000
17.00
8.90
8.30
1100
23.00
10.20
9.00

Questions:

  1. Does each SR average cost curve have the “typical” shape?
  2. Is there one method which would tend be best overall?
  3. Is there one method which is best in all cases, regardless of the output specified?
  4. Can you see that considering each of the three patterns helps one see the nature of Long Run average costs?
  5. For the Long Run Average Cost curve implied by the three methods, it is possible to say the gigantic plant (#3) is too big. How can this be concluded? What is likely to be the explanation?
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