Question

The table below contains average cost data for four different-sized plants—1, 2, 3, and 4—which are the only four sizes possible.
   

Output	Plant 1	Plant 2	Plant 3	Plant 4
110	$135	$155	$180	$200
160	125	135	160	180
210	135	120	135	150
260	150	140	115	140
310	180	160	140	110
360	210	180	165	150
410	245	205	195	180

a. What is the economic capacity output for each of the four plants?

     Plant 1:
     Plant 2:
     Plant 3:
     Plant 4:

b. In what plant and at what output is minimum long-run average cost achieved?

    Output of  in  (Click to select)  1  2  3  4  .

c. Which plant is the right size to produce an output of 210?

       (Click to select)  Plant 1  Plant 2  Plant 3  Plant 4

d. Which plant is the right size to produce an output of 110?

       (Click to select)  Plant 1  Plant 2  Plant 3  Plant 4

Answer 1

(a) The output corresponding to minimum average cost is the economic capacity of that plant.

Minimum average cost in Plant 1 is $125 corresponding to 160 units of output.

Thus, economic capacity of plant 1 is 160 units of output.

Minimum average cost in Plant 2 is $120 corresponding to 210 units of output.

Thus, economic capacity of plant 2 is 210 units of output.

Minimum average cost in Plant 3 is $115 corresponding to 260 units of output.

Thus, economic capacity of plant 3 is 260 units of output.

Minimum average cost in Plant 4 is $110 corresponding to 310 units of output.

Thus, economic capacity of plant 4 is 310 units of output.

(b)

Output	Plant 1	Plant 2	Plant 3	Plant 4	Long run average cost
110	135	155	180	200	135
160	125	135	160	180	125
210	135	120	135	150	120
260	150	140	115	140	115
310	180	160	140	110	110
360	210	180	165	150	150
410	245	205	195	180	180

Long run average cost is the minimum average cost of producing each output among the four plants.

For example, the minimum average cost of producing 110 uints of output is $135 using plant 1.

Minimum long run average cost is achieved is $110 at 310 units of output. This cost is achieved in plant 4.

Answer: Plant 4.

Output 310

(c) Plant 2 is the right size to produce an output of 210.

becasue the average cost is minimum for 210 units of output if it is produced in plant 2.

(d) Plant 1 is the right size to produce an output of 110.

because the average cost is minimum for 110 units of output if it is produced in plant 1.

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