Answer to Question #287558 in Macroeconomics for munna

Question

If a firm is operating in the area of constant returns to scale, what will happen to average total costs in the short run if the firm expands production? Why? What will happen to average total costs in the loge run? Why?

 

Answer 1

Solution:

The average total costs in the short run do not change at all if the firm expands production when operating in the area of constant returns to scale. This is because expanding all inputs proportionately does not change the average cost of production.

 

In the long run, the average total costs will increase proportionally to the increase in output when operating in the area of constant returns to scale. This is because the long-run average cost of the firm is not impacted.