The graph below includes two plant sizes as illustrated by AC 1 and AC 2 . -Refer to the graph above to answer this question.All of the following statements except one are correct if a small market limits a firm's output to Q₁.Which is the exception? A)The firm is not achieving capacity output in plant 1. B)The firm is not achieving minimum efficient scale. C)The firm is experiencing excess capacity. D)The firm would benefit from a larger market. E)Building a larger plant would lower the firm's average cost of producing Q₁.

Question

Quizplus · Accepted Answer

Given that the firm's output is limited to Q₁, it implies that the firm is not operating at its most efficient scale, which is typically associated with achieving minimum efficient scale or capacity output. Statements A, B, C, and D are correct because they reflect the consequences of operating below capacity output or minimum efficient scale, such as not achieving capacity output in plant 1 (A), not achieving minimum efficient scale (B), experiencing excess capacity (C), and potentially benefiting from a larger market (D) to increase production and sales. However, statement E is the exception because building a larger plant would not necessarily lower the firm's average cost of producing Q₁ if the firm is already experiencing excess capacity; instead, it might increase average costs due to underutilization of the new, larger capacity.

The Graph Below Includes Two Plant Sizes as Illustrated by AC1

The Graph Below Includes Two Plant Sizes as Illustrated by AC₁