Sunday, August 14, 2011

Question About Long Run Average Total Cost Curve (LRATC)?

B: At low levels of output on the LRATC curve both average fixed and average variable costs decrease because output increases as a company uses long run strategies (such as producing a new factory) to increase output, however at high levels of output on the LRATC curve companies reach a point of inefficiency, where long term financial strategies will not increase output by enough to offset the increased variable cost (point of diminishing returns). However, Fixed costs remain constant, so the total average fixed costs actually continues to decrease.

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