It was also mentioned in class that in the long-run all the costs are variable, owing to the ability to alter plant sizes in the long-run (in the short-run the plant size is fixed but it is still possible to increase output in the short-run by changing the quantity of the variable inputs).

The figure below gives a sequence of short-run average total cost (ATC) curves numbered 1 through 7 corresponding to seven different plant sizes.

(a)Copy the figure and draw the long-run average cost curve on the copy.

(b)If the desired level of output is 100 units per day, what is the best plant size to produce this output? Give the number of the associated ATC curve.

(c)If the desired level of output is 200 units per day, what is the best plant size to produce this output? Give the number of the associated ATC curve.

(d)Explain the meaning of the term "minimum efficient scale".

(e)From looking at the graph do you think the "minimum efficient scale" is closer to 200 units per day or to 100 units per day?

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