Question

1.)  Economies of scale refer to

A.) the minimum point on the short-run average total cost curve

B.) the flat portion of the long-run average total cost curve.

C.) a decrease in the long-run average total cost of production as output increases.

D.) a and b

E.) none of the above

.

2.) Minimum efficient scale refers to the

A.) minimum size plant in any given industry

B.) minimum point on the short-run average total cost curve

C.) output level when economies of scale first set in

D.) output level when diseconomies of scale first set in

E.) lowest output level at which average total costs are minimized

.

3.) In long-run competitive equilibrium P = SRATC, because if P > SRATC

A.) losses in the industry would cause some existing firms to exit the industry

B.) positive economic profit would attract firms to the industry in order to obtain the profits

C.) firms would not be producing the quantity of output at which MR = MC

D.) firms would not be covering total fixed costs

E.) none of the above

Answer 1

Answer : 1) The answer is option C.

If output increase and at the same time the long-run average total cost decrease then the firm face a situation of increasing returns to scale. The increase in returns to scale is also known as economies of scale. Hence except option C other options are not correct. Therefore, option C is the correct answer.

2) The answer is option E.

If at a output level where the long-run average total cost is minimum then the situation is called the minimum efficient scale. Hence except option E other options are not correct. Therefore, option E is the correct answer.

3) The answer is option B.

If in short-run the price is higher then the firm's average total cost, i.e., P > SRATC, then the firm earn positive economic profit which attract more firms to enter into the market in long-run. As a result, in long-run the market supply increase which decrease the price level continuously until it reaches to SRATC. Hence except option B other options are not correct. Therefore, option B is the correct answer.