Question

The following table indicates the average total cost of producing varying quantities of output from 3 different plants:

Output	10	20	30	40	50	60	70	80
Small firm	6,000	5,000	4,000	5,000	6,000	7,000	8,000	9,000
Medium firm	8,000	6,500	5,000	3,500	3,000	4,000	5,000	6,000
Large firm	10,000	9,000	7,500	6,000	4,000	2,500	3,000	3,500

1. Plot the ATC curves for all three firms on a graph.

2. What size plant should be used to produce 30 units of output? Explain.

3. What size plant(s) should be used to produce 60 units of output? Explain.

4. Are there economies of scale in these plant size choices? Explain where and label on graph above.

Answer 1

(a) The following table describes the ATC of firms.

Output	Small firms	Medium firm	Large firm
10	6000	8000	10000
20	5000	6500	9000
30	4000	5000	7500
40	5000	3500	6000
50	6000	3000	4000
60	7000	4000	2500
70	8000	5000	3000
80	9000	6000	3500

(b) Small firms should be used to produce 30 units of output because small firm produces 30 units at lower ATC than other firms.

(c) Large firms should be used to produce 60 units of output because large firm produces 60 units at lower ATC than other firms.

(d) Economies of scales occur when there is a fall in ATC as output rises.

For small firms, economies of scale occur from 10 units of output to 30 units of output.

For medium-firm, economies of scale occur from 10 units of output to 50 units of output

For large firms, economies of scale occur from 10 units of output to 60 units of output.