In August 2008, Toyota halted production of the Tundra, its full-size, gas-guzzling pick-up. Sales of the vehicle are down 15 percent and the production suspension could last for months. When production of the truck resumes, it'll be at a slower pace. If Toyota, like many car makers, experiences increasing returns to scale, what would happen to long run average cost if production resumed, but at a slower pace?
A) Long run average cost would increase.
B) Long run average cost would decrease.
C) Long run average cost would stay constant.
D) Long run average cost would increase and then decrease.

Question

Quizplus · Accepted Answer

If Toyota experiences increasing returns to scale, producing at a slower pace would mean not fully utilizing the efficiencies gained from scaling up production, leading to an increase in long run average cost.

In August 2008, Toyota Halted Production of the Tundra, Its