Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Which of the following statements is true?
A) The firm experiences increasing returns to scale at production levels above 130 units of output.
B) The firm experiences constant returns to scale.
C) The firm experiences increasing returns to scale up to a production level of 130 units of output.
D) The firm experiences decreasing returns to scale up to a production level of 130 units of output.

Question

Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Which of the following statements is true? 
A) The firm experiences increasing returns to scale at production levels above 130 units of output. 
B) The firm experiences constant returns to scale. 
C) The firm experiences increasing returns to scale up to a production level of 130 units of output. 
D) The firm experiences decreasing returns to scale up to a production level of 130 units of output.

Quizplus · Accepted Answer

As we move from AC1 to AC2 and then to AC3, we see that the average cost of production decreases as the level of output increases up to a production level of 130 units. This indicates increasing returns to scale. However, beyond a production level of 130 units, the average cost of production starts increasing, indicating decreasing returns to scale. Therefore, option C is the correct answer.