Suppose a firm's total cost curve can be written TC(Q) = Q - .5Q² + Q³, with marginal cost MC(Q) = 1 - Q + 3Q². This cost function exhibits: A) economies of scale B) diseconomies of scale C) neither diseconomies nor economies of scale. D) economies of scale for output levels less than some level, Q₁ = 1/4, and diseconomies of scale thereafter.

Question

Quizplus · Accepted Answer

The cost function exhibits economies of scale for lower levels of output (where MC(Q)AC(Q)). The turning point where the firm switches from experiencing economies of scale to diseconomies of scale occurs at Q₁ = 1/4. Therefore, the correct choice is D.

Suppose a Firm's Total Cost Curve Can Be Written TC(Q)