Consider the following cost curves for Firm X,a perfectly competitive firm.
FIGURE 9- 5
-Refer to Figure 9- 5.If Firm X has a capital stock that generates SRATC1,then in the long run Firm X will have to

Question

Consider the following cost curves for Firm X,a perfectly competitive firm.
  FIGURE 9- 5
-Refer to Figure 9- 5.If Firm X has a capital stock that generates SRATC1,then in the long run Firm X will have to

Quizplus · Accepted Answer

In the long run, a perfectly competitive firm like X will have to adjust its plant size to achieve minimum efficient scale (MES) and operate at the lowest point on the LRAC curve (SRATC2 in this case). Operating at MES will allow the firm to produce at the lowest cost per unit of output and remain profitable in the long run. Since Firm X's current plant generates SRATC1, it is operating above MES and will need to either expand its plant size to achieve MES or exit the industry. Therefore, the best choice is B.

Consider the Following Cost Curves for Firm X,a Perfectly Competitive