Question

How would an increase in a firm’s level of technology – for example, an increase in labor productivity – affect its cost curves (all else equal)? Would the range of production where the firm experiences economies of scale increase or decrease? Explain.

Answer 1

An increase in the level of firm's technology would lead to a U -shaped cost curve. A U- shaped cost curve indicates that the cost decreases as output increases and then cost increases as output goes beyond optimum level.An increase in the fim's level of technology means that output can be produced with more efficiency. As efficiency increases cost per unit output decreases and a U -shaped cost curve is obtained. An improvement in technology indicates that more output can be produced with the same amount of given inputs. For example- Labour productivity increases. As labour productivity increases each labor works more efficiently than before.The same labor can now produce more outputs than before. Thus, an increase in output is gained without hiring extra workers for more output and the existing workers are able to increase the level of output with greater efficiency.Hence cost per unit decreases.

The range of production where the firm experiences economies of scale increases.This will happen because greater efficiency is obtained with improved technology. More outputs can be produced with less per unit cost and hence the range of production where the firm experiences economies of scale increases.