The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes. FIGURE 8- 3
-Refer to Figure 8- 3. If this firm is producing at point B, then
A) this firm is producing a level of output that is technically inefficient in the long run.
B) this firm could produce the same level of output at a lower cost with plant size 2.
C) it should employ more of its variable factors of production.
D) this firm is experiencing decreasing returns to scale.
E) plant size 1 is optimal.

Question

The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.  FIGURE 8- 3
-Refer to Figure 8- 3. If this firm is producing at point B, then
A) this firm is producing a level of output that is technically inefficient in the long run. 
B) this firm could produce the same level of output at a lower cost with plant size 2. 
C) it should employ more of its variable factors of production. 
D) this firm is experiencing decreasing returns to scale. 
E) plant size 1 is optimal.

Quizplus · Accepted Answer

Point B lies on the SRATC1 curve, which means the firm is currently operating with a smaller plant size. However, it could produce the same level of output at a lower cost with plant size 2, which has a lower SRATC2 curve. Therefore, the firm could improve its long-run efficiency by expanding its plant size.

The Figure Below Shows a Family of Cost Curves for a Firm