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. In this range of output, there are constant returns to scale. When the output is 100, LAC is downward sloping. When the output is 100, LMC exceeds LAC. When the output is 100, LMC is downward sloping. If the firm has increased the quantity of each input by 5 percent, output would increase from 100 to 110 units.

Solution

a. Inputs are increased by 10 % result into the 20 % rise in the oputput, then it constitutes the increasing returns to scale. Hence given statement is false

b. output increases more than increase in inputs provided price is constant. Hence LAC will fall down. When output is 100, LAC slopes downward is correct statement.

c. At 100 both MC as well as AC falls hence and MC is below the AC. This is false statement

d. MC is downward sloping at 100. This is correct statement

e. Certain change in inputs shall cause double change in the output. Hence this is true statement.