Question

Current management has decided the size of a physical building for your production (short run ATC) today. Once you, as an upper-level manager, decide to increase future output production (long run ATC), the long run costs will continue to decline.

A. True
B. False

Answer 1

The claim that long run costs will always decline with increased production is false. The long run ATC curve shows economies of scale, constant returns to scale, and potential diseconomies of scale, the latter leading to increased average costs.

Step-by-step explanation:

The statement that long run costs will continue to decline as output production increases is false. In the long run, all costs are variable and a firm has the flexibility to change production levels by altering the amounts of all input factors. The long run average total cost (ATC) curve typically reflects economies of scale, constant returns to scale, and diseconomies of scale. Initially, as production increases, a firm may experience economies of scale where the average cost per unit decreases.

However, there comes a point when the firm will experience constant returns to scale, meaning that the average cost per unit does not change with the increase in output. Eventually, if the scale of production becomes very large, the firm may experience diseconomies of scale, which leads to an increase in the average cost per unit. Real-world examples, such as overly large factories in planned economies, demonstrate diseconomies of scale resulting from management difficulties and inefficient communication.