Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

164 COSTS OF PRODUCTION [CHAP. 7
(a)
Fig. 7-14
(b)
In Fig. 7-14, we have increasing returns to scale or decreasing LAC up to output OA; we have constant returns
to scale or constant LAC between the output levels OA and OB; and past output OB, we have decreasing returns
to scale or increasing LAC. Thus LAC and returns to scale are opposite sides of the same coin. Note that economies
and diseconomies of scale may both be operating over the same range of outputs. When economies of
scale overwhelm diseconomies of scale, the LAC curve falls, otherwise the LAC is either constant or rising.
The actual output level at which the LAC stops falling or starts rising depends, of course, on the industry.
A LAC curve with a flat bottom, showing constant returns to scale over a wide range of outputs, implies that
small firms coexist side by side with much larger firms in the same industry. If increasing returns to scale
operated over a very wide range of outputs, large firms (operating large plants) would have much lower
LAC than small firms and would drive the latter out of business. Many economists and business experts
believe (and some empirical studies indicate) that the LAC curve in many industries has a flat bottom as
in Fig. 7-14. In such cases, there is not a single optimum scale of plant, but many. That is, the flat portion
of the LAC curve is formed by the lowest point of many SAC curves.
7.15 The LAC schedule in Table 7.8 is read off or estimated from the LAC curve of Problem 7.12. (a) From
this LAC schedule, find the LMC schedule, (b) On the same set of axes plot the LAC and LMC schedules,
(c) What is the relationship between the LAC curve and the LMC curve? What would the LMC
curve corresponding to the LAC curve of Problem 7.14(a) look like?
Table 7.8
Q 1 2 3 4 5 6 7 8 9 10 11 12
LAC ($) 15 13 11.30 10 9 8.30 8 8.20 8.90 10 11.30 13
(a) Table 7.9
Q 1 2 3 4 5 6 7 8 9 10 11 12
LAC ($) 15 13 11.30 10.00 9 8.30 8.00 8.20 8.90 10 11.30 13.00
LTC ($) 15 26 33.90 40.00 45 49.80 56.00 65.60 80.10 100 124.30 156.00
LMC ($) .. 11 7.90 6.10 5 4.80 6.20 9.60 14.50 19.90 24.30 31.70