Exhibit 6-14 Cost curves

-In Exhibit 6-14,a firm finds that it is experiencing numerous managerial and information problems.The position of its short- and long-run average total cost curves suggest that it is operating at a production level:

Question

Exhibit 6-14 Cost curves
 
-In Exhibit 6-14,a firm finds that it is experiencing numerous managerial and information problems.The position of its short- and long-run average total cost curves suggest that it is operating at a production level:

Quizplus · Accepted Answer

The firm is experiencing numerous managerial and information problems, which suggests that it is not operating efficiently. The point where the short-run and long-run average total cost curves intersect is the minimum efficient scale (MES) of production, and this firm is operating beyond the MES. Based on the exhibit, the production level is between 3,000 and 4,000 units, which is beyond the point where average total cost starts to increase at an increasing rate (i.e., beyond the MES). Therefore, the firm should either restructure its operations or consider shutting down. Option E is not the best choice because the firm is still producing output and generating revenue, albeit at a higher cost.

Exhibit 6-14 Cost Curves