Question: A firms learning curve, which shows the relation-ship between average cost and cumulative output (the sum of its output since the firm started producing), is

A firm’s learning curve, which shows the relation-ship between average cost and cumulative output (the sum of its output since the firm started producing), is AC = a + bN–r; where AC is its average cost; N is its cumulative output; a, b, and r are constants; and 0 < r < 1.

a. What is the firm’s AC if r = 0? What can you say about the firm’s ability to learn by doing?

b. If r exceeds zero, what can you say about the firm’s ability to learn by doing? What happens to its AC as its cumulative output, N, gets extremely large? Given this result, what is your interpretation of a?

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