microeconomics book solution 12

# C false in the long run choosing a higher level of

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c. False. In the long run, choosing a higher level of fixed cost allows you to move along and to the right on the long-run average total cost curve. In the long run, if you want to produce a larger quantity of output, you would optimally increase the level of fixed cost (this will decrease the average variable cost). You will do this in such a way as to spend the lowest possible average total cost; that is, you will be on the long-run average total cost curve but farther to the right (at a larger quan- tity of output). ATC LRATC 20 40 60 0 \$450 400 350 300 250 Cost of order Quantity of orders C H A P T E R 1 2 B E H I N D T H E S U P P LY C U R V E : I N P U T S A N D C O S T S S-183 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-183

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Solution 16. Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW’s long-run average total cost. a. For which levels of output does WW experience increasing returns to scale? b. For which levels of output does WW experience decreasing returns to scale? c. For which levels of output does WW experience constant returns to scale? 16. a. WW’s long-run average total cost is decreasing over the range of output between 1 and 4 cars. So over that range, WW experiences increasing returns to scale. b. WW’s long-run average total cost is increasing over the range of output between 6 and 8 cars. So over that range, WW experiences decreasing returns to scale. c. WW’s long-run average total cost is constant over the range of output between 4 and 6 cars. So over that range, WW experiences constant returns to scale. Quantity of ca r s LRATC of ca r 1 \$ 30,000 2 20,000 3 15,000 4 12,000 5 12,000 6 12,000 7 14,000 8 1 8 ,000 S-184 C H A P T E R 1 2 B E H I N D T H E S U P P LY C U R V E : I N P U T S A N D C O S T S S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-184
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