2 The figure below illustrates a series of shortrun cost cur

2. The figure below illustrates a series of short-run cost curves numbered ACi through AC4, which correspond to the only four different plant sizes possible. 2000 1600 1200 800 400 10 20 30 40 50 60 Quantity per period (a) What can you say about returns to scale? (I mark) (b) Are economies of scale present? (1 mark) (c) What is the long run average cost that can be realized by this business? (I mark) (c) If it takes 6 workers and 30 units of capital to produce 10 units of output, how much labour and capital are necessary to produce 20 units of output? (2 marks)

Solution

a. The cost per unit is constant even when the inputs are changed. For all Short run cost curves it is constant. Hence it is constant returns to scale.

B. By economies of scale we mean decline in per unit cost as we expand but in this case the cost per unit is constant that is there is no impact of expansion. Hence no economies of scale is present.

C. The long run average cost that can be realized from this business is $800.

D. Here the given case returns to scale is constant that is if input is doubled then the output will also get doubled. That is magnitude of change in input will be equal to the magnitude of change in output.

6 workers and 30 units of capital produces 10 units of output

For 20 units of output

12 workers and 60 units of capital.