The graph below includes two plant sizes as illustrated by AC 1 and AC 2 . -Refer to the graph above to answer this question.If the firm is producing in a plant with AC₁ as its short run average cost curve,and a small market is limiting the firm's output to Q₁,which of the following statements is true? A)Building a larger plant would lower the firm's average cost of producing Q₁₀. B)Increasing the output in the current plant size would not lower the short-run average cost. C)The firm would benefit from a larger market because it could build a larger plant,capture economies of scale and achieve economic capacity. D)The firm would benefit from a larger market because it could build a larger plant and capture economies of scale,but it still would not be able to achieve economic capacity.

Question

Quizplus · Accepted Answer

The firm is currently limited by a small market, which restricts its output. If the market were larger, the firm could expand its plant size, take advantage of economies of scale, and operate at a more efficient scale (economic capacity), thus reducing average costs.

The Graph Below Includes Two Plant Sizes as Illustrated by AC1

The Graph Below Includes Two Plant Sizes as Illustrated by AC₁