Suppose that a firm faced with constant input prices recentl

Suppose that a firm, faced with constant input prices, recently increased the quantity of each of inputs by 10 percent. As a result, its output increased from 100 units to 120 units. Indicate whether each of the following statements is true, false or uncertain, along with a brief explanation.

a)     In this range of output, there are constant returns to scale. b)     When the output is 100, LAC is downward sloping.

c)     When the output is 100, LMC exceeds LAC.

d)     When the output is 100, LMC is downward sloping.

e)     If the firm has increased the quantity of each input by 5 percent, output would increase from

100 to 110 units.

Solution

Suppose that a firm, faced with constant input prices, recently increased the quantity of each of inputs by 10 percent. As a result, its output increased from 100 units to 120 units.

c)     When the output is 100, LMC exceeds LAC.

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