Short free-response question

Choosing a factory size

Unit 3
5 points
About 12 minutes

A shorter question with a few lettered parts on one situation, often built on a table, a payoff matrix or a given or described graph. You make claims, explain them, calculate a value, or describe a labeled graph and show a change on it. On the exam: Questions 2 and 3 of 3 in Section II; 5 points each, a quarter of the section score each. About 12 minutes suggested for each. Four-function calculator allowed.

The question and its sources

A firm can choose among factories of different sizes. The table shows the firm's long-run average total cost (LRATC) at different levels of output.

Table 1. Long-run average total cost

Output (units per week)	LRATC
100	$12
200	$9
300	$8
400	$8
500	$10

Source: Hypothetical data

Suggested time: 12 minutes

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Part (a)

1 point

Identify the range of output over which the firm experiences economies of scale. Explain using the data.

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Part (b)

1 point

Identify the minimum efficient scale for this firm.

Your answer to part (b)

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Part (c)

1 point

Identify the type of returns to scale the firm experiences between 300 and 400 units of output.

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Part (d)

1 point

Between 400 and 500 units, LRATC rises. Explain one reason a firm's long-run average total cost can rise as it grows.

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Part (e)

1 point

Suppose this firm is in a perfectly competitive increasing-cost industry. Market demand for the product increases permanently. Compared with the original long-run equilibrium price, identify whether the new long-run equilibrium price will be higher, lower, or the same. Explain.

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