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    Economies of Scale: Cost Curves and Output

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    Industry studies often suggest that firms may have long-run average cost curves that show some output range over which there are economies of scale and a wide range of output over which long-run average cost is constant; finally, at very high output, there are diseconomies of scale.

    Draw a representative long-run average cost curve, and indicate the minimum efficient scale.

    Would you expect that firms in an industry like this would all produce about the same level of output? Why?

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    Solution Preview

    This is the long-run concept of return to scale. In the long run all factors of productions can be decision variable, including the size of factory.

    First, you should draw a U-shaped long-run average cost curve -LRAC (refer to the attachment). there are three areas as shown in the graph:
    1. Economies of scale (increasing return to scale): this is the area whereby the LRAC is declining. It means the average cost is declining as the scale or the size of operation increases. Remember in the long run or factors are variable, including capital. Therefore, the size ...

    Solution Summary

    This response discuses the concept of "the return to scale" as a long run concept. It looks at the the variables of long run factors of productions and the cost curve of such processes.