Suppose that a firm's total cost of producing an output of 400 units a day is currently $2,000.If technology and the price of inputs remain unchanged,what level of output would be produced if total cost rises to $4,000 and decreasing returns to scale exist?
A)5 units.
B)More than 400 but less than 800 units.
C)800 units.
D)More than 800 units.

Question

Quizplus · Accepted Answer

If the total cost doubles from $2,000 to $4,000, then the cost per unit must also double. Therefore, the cost per unit increases from $5 ($2,000/400) to $10 ($4,000/X) where X is the new level of output. If there are decreasing returns to scale, then the cost per unit will increase as output increases. Therefore, the new level of output must be between 400 and 800 units, since at 800 units, the cost per unit would still be $5 ($4,000/800). Thus, the best choice is B, more than 400 but less than 800 units.

Suppose That a Firm's Total Cost of Producing an Output