Plant sizes get larger as you move from ATC-1 to ATC-4. In the long run, the firm should use plant size ATC-3 for what level of output?

Question

Plant sizes get larger as you move from ATC-1 to ATC-4.  In the long run, the firm should use plant size ATC-3 for what level of output?

Quizplus · Accepted Answer

The optimal plant size for a given level of output is the plant at which the long-run average total cost (LRATC) is minimized. In this case, we see that plant sizes increase as we move from ATC-1 to ATC-4. This suggests that LRATC declines up to a particular point and then starts increasing. Therefore, the most efficient plant size is where LRATC is minimum.

From the graph, we can see that ATC-3 is the plant size where LRATC is minimum. So, the firm should use plant size ATC-3 for the level of output that minimizes long-run average total cost.

Looking at the graph, we can estimate that this occurs at an output level of approximately 4,000 to 4,500 units. Therefore, the best choice is C, 4,000 to 4,500.

Plant Sizes Get Larger as You Move from ATC-1 to ATC-4