Unit III

Q.1: Explain the meaning of demand forecasting. What are the determinants of demand forecasting? Discuss.

Ans: A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast.

Determination of the demand forecasts is done through the following steps:

• Determine the use of the forecast

• Select the items to be forecast

• Determine the time horizon of the forecast

• Select the forecasting model(s)

• Gather the data

• Make the forecast

• Validate and implement results

The time horizon of the forecast is classified as follows:

Description

Forecast Horizon

Short-range

Medium-range

Long-range

Duration

Usually less than 3 months, maximum of 1 year

3 months to 3 years

More than 3 years

Applicability

Job scheduling, worker assignments

Sales and production planning, budgeting

New product development, facilities planning

Q.2: How does demand forecast help an organization? Also elaborate upon the methods of demand forecasting.

OR

How is demand forecast determined?

Ans: Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

There are two approaches to determine demand forecast – (1) the qualitative approach, (2) the quantitative approach. The comparison of these two approaches is shown below:

Description

Qualitative Approach

Quantitative Approach

Applicability

Used when situation is vague & little data exist (e.g., new products and technologies)

Used when situation is stable & historical data exist

(e.g. existing products, current technology)

Considerations

Involves intuition and experience

Involves mathematical techniques

Techniques

Jury of executive opinion

Sales force composite

Delphi method

Consumer market survey

Time series models

Causal models

Q.3: Explain any four qualitative methods of demand forecasting.

OR

Brief any two methods of demand Forecasting. (UPTU2010-11)

Ans: Your Company may wish to try any of the qualitative forecasting methods below if you do not have historical data on your products' sales.

Qualitative Method

Description

Jury of executive opinion

The opinions of a small group of high-level managers are pooled and together they estimate demand. The group uses their managerial experience, and in some cases, combines the results of statistical models.

Sales force composite

Each salesperson (for example for a territorial coverage) is asked to project their sales. Since the salesperson is the one closest to the marketplace, he has the capacity to know what the customer wants. These projections are then combined at the municipal, provincial and regional levels.

Delphi method

A panel of experts is identified where an expert could be a decision maker, an ordinary employee, or an industry expert. Each of them will be asked individually for their estimate of the demand. An iterative process is conducted until the experts have reached a consensus.

Consumer market survey

The customers are asked about their purchasing plans and their projected buying behavior. A large number of respondents is needed here to be able to generalize certain results.

Q.4: What are the various statistical methods of demand forecasting? Explain any two of them.

Ans: There are two forecasting models here – (1) the time series model and (2) the causal model. A time series is a s et of evenly spaced numerical data and is o obtained by observing responses at regular time periods. In the time series model, the forecast is based only on past values and assumes that factors that influence the past, the present and the future sales of your products will continue. On the other hand, the causal model uses a mathematical technique known as the regression analysis that relates a dependent variable (for example, demand) to an independent variable (for example, price, advertisement, etc.) in the form of a linear equation. The time series forecasting methods are described below:

Time Series Forecasting Method

Description

Naïve Approach

Assumes that demand in the next period is the same as demand in most recent period; demand pattern may not always be that stable

For example:

If July sales were 50, then Augusts sales will also be 50

 

Time Series Forecasting Method

Description

Moving Averages (MA)

MA is a series of arithmetic means and is used if little or no trend is present in the data; provides an overall impression of data over time

A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral patterns.

Equation:

F 4 = [D 1 + D2 + D3] / 4

F – Forecast, D – Demand, No. – Period

(see illustrative example – simple moving average)

A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0

Equation:

WMA 4 = (W) (D3) + (W) (D2) + (W) (D1)

WMA – Weighted moving average, W – Weight, D – Demand, No. – Period

(see illustrative example – weighted moving average)

Exponential Smoothing

The exponential smoothing is an averaging method that reacts more strongly to recent changes in demand by assigning a smoothing constant to the most recent data more strongly; useful if recent changes in data are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations

F t + 1 = a D t + (1 - a ) F t

Where

F t + 1 = the forecast for the next period

D t = actual demand in the present period

F t = the previously determined forecast for the present period

•  = a weighting factor referred to as the smoothing constant

(see illustrative example – exponential smoothing)

Time Series Decomposition

The time series decomposition adjusts the seasonality by multiplying the normal forecast by a seasonal factor

(see illustrative example – time series decomposition)

Q.5:Discuss the meaning and importance of production function.

OR

Write a note on Production Function. (UPTU2011-12)

Ans: Production Function: A given output can be produced with many different combinations of factors of production (land, labor, capita! and organization) or inputs. The output, thus, is a function of inputs. The functional relationship that exists between physical inputs and physical output of a firm is called production function.

 Formula:  

In abstract term, it is written in the form of formula: 

Q = f (x1, x2, ......., xn)

Q is the maximum quantity of output and x1, x2, xn are quantities of various inputs. The functional relationship between inputs and output is governed by the laws of returns.

 

(i) The law of variable proportion seeking to analyze production in the short period.

 

(ii) The law of returns to scale seeking to analyze production in the long period.

Q.6:"If an increasing amount of a variable factor are applied to a fixed quantity of other factors per unit of time, the increments in total output will first increase but beyond some point, it begins to decline" explain in detail.

OR

Write a note on short run production function.

Ans: Law of Diminishing Returns/Law of Increasing Cost:

 

The law of diminishing returns (also called the Law of Increasing Costs) is an important law of micro economics. The law of diminishing returns states that:"If increasing amounts of a variable factor are applied to a fixed quantity of other factors per unit of time, the increments in total output will first increase but beyond some point, it begins to decline".

 

Richard A. Bilas describes the law of diminishing returns in the following words:"If the input of one resource to other resources are held constant, total product (output) will increase but beyond some point, the resulting output increases will become smaller and smaller".

 

The law of diminishing return can be studied from two points of view, (i) as it applies to agriculture and (ii) as it applies in the field of industry.

                  

(1) Operation of Law of Diminishing Returns in Agriculture: 

It is the practical experience of every farmer that if he wishes to raise a large quantity of food or other raw material requirements of the world from a particular piece of land, he cannot do so. He knows it fully that the producing capacity of the soil is limited and is subject to exhaustation. As he applies more and more units of labor to a given piece of land, the total produce no doubt increases but it increases at a diminishing rate.

 For example, if the number of labor is doubled, the total yield of his land will not be double. It will be less than double. If it becomes possible to increase the yield in the very same ratio in which the units of labor are increased, then the raw material requirements of the whole world can be met by intensive cultivation in a single flower-pot. As this is not possible, so a rational farmer increases the application of the units of labor on a piece of land up to a point which is most profitable to him. This is in brief, is the law of diminishing returns. Marshall has stated this law as such:

 "As Increase in capital and labor applied to the cultivation of land causes in general a less than proportionate increase in the amount of the produce raised, unless it happens to coincide with the improvement in the act of agriculture".

 Explanation and Example:

 This law can be made clearer if we explain it with the help, of a schedule and a curve.

 

Fixed Input

Inputs of Variable Resources

Total Produce TP (in tons)

Marginal product MP   (in tons)

12 Acres

12 Acres

12 Acers

12 Acres

12 Acers

12 Acres

1 Labor

2 Labor

3 Labor

4 Labor

5 Labor

6 Labor

50

120

180

200

200

195

50

70

60

20

0

-5

 

In the schedule given above, a firm first cultivates 12 acres of land (Fixed input) by applying one unit of labor and produces 50 tons of wheat.. When it applies 2 units of labor, the total produce increases to 120 tons of wheat, here, the total output increased to more than double by doubling the units of labor. It is because the piece of land is under-cultivated. Had he applied two units of labor in the very beginning, the marginal return would have diminished by the application of second unit of labor.

 In our schedules the rate of return is at its maximum when two units of labor are applied. When a third unit of labor is employed, the marginal return comes down to 60 tons of wheat with the application of 4th unit. The marginal return goes down to 20 tons of wheat and when 5th unit is applied it makes no addition to the total output. The sixth unit decreased it. This tendency of marginal returns to diminish as successive units of a variable resource (labor) are added to a fixed resource (land), is called the law of diminishing returns. The above schedule can be represented graphically as follows:

 

Diagram/Graph:

 

 

In Fig. (11.2) along OX are measured doses of labor applied to a piece of land and along OY, the marginal return. In the beginning the land was not adequately cultivated, so the additional product of the second unit increased more than of first. When 2 units of labor were applied, the total yield was the highest and so was the marginal return. When the number of workers is increased from 2 to 3 and more. The MP begins to decrease. As fifth unit of labor was applied, the marginal return fell down to zero and then it decreased to 5 tons.

Assumptions: 

The table and the diagram is based on the following assumptions:

 (i) The time is too short for a firm to change the quantity of fixed factors.

 (ii) It is assumed that labor is the only variable factor. As output increases, there occurs no change in the factor prices.

 (iii) All the units of the variable factor are equally efficient. 

(iv) There are no changes in the techniques of production.

 

(2) Operation of the Law in the Field of Industry:

 The modern economists are of the opinion that the law of diminishing returns is not exclusively confined to agricultural sector, but it has a much wider application. They are of the view that whenever the supply of any essential factor of production cannot be increased or substituted proportionately with the other sectors, the return per unit of variable factor begins to decline. The law of diminishing returns is therefore, also called the Law of Variable Proportions. Mrs. John Robinson goes deeper into the causes of diminishing returns and says that:"If all factors of production become perfect substitute for one another, then the law of diminishing returns will not operate at any stage".

 For instance, if sugarcane runs short of demand and some other raw material takes its place as its perfect substitute, then the elasticity of substitution between sugarcane and the other raw material will be infinite. The price of sugarcane will not rise and so the laws of diminishing returns will not operate. The law of diminishing returns, therefore, in due to Imperfect substitutability of factors of production.

The law of diminishing returns is also called as the Law of Increasing Cost. This is because of the fact that as one applies successive units of a variable factor to fixed factor; the marginal returns begin to diminish. With the cost of each variable factor remaining unchanged by assumptions and the marginal returns registering .decline, the cost per unit in general goes on increasing. This tendency of the cost per unit to rise as successive units of a variable factor are added to a given quantity of a fixed factor is called the law of Increasing Cost.

       

Q.7: Define the following terms: Marginal cost, short run average cost curve, long run average cost curve, production cost, sundry cost, selling cost.

Ans: Marginal Cost (MC):  Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as:"The cost that results from a one unit change in the production rate".

Short Run Average Cost Curve:

 In the short run, the shape of the average total cost curve (ATC) is U-shaped. The, short run average cost curve falls in the beginning, reaches a minimum and then begins to rise. The reasons for the average cost to fall in the beginning of production are that the fixed factors of a firm remain the same. The change only takes place in the variable factors such as raw material, labor, etc.

Long Run Average Cost Curve:

In the long run, all costs of a firm are variable. The factors of production can be used in varying proportions to deal with an increased output. The firm having time-period long enough can build larger scale or type of plant to produce the anticipated output. The shape of the long run average cost curve is also U-shaped but is flatter that the short run curve

Production Costs:

 It includes material costs, rent cost, wage cost, interest cost and normal profit of the entrepreneur.

 Selling Costs:

 It includes transportation, marketing and selling costs.

Sundry Costs: 

It includes other costs such as insurance charges, payment of taxes and rate, etc., etc.

 

Q.8: Explain the relationship between marginal cost and average cost in the short run with the help of diagram.

OR

Write a note on Cost and Revenue Curves. (UPTU2011-12)

Ans: Average Cost (AC): Average cost refers to fixed cost per unit of output. Average fixed Cost is found out by dividing the total cost by the corresponding output.

AFC = TFC

output (Q)

Marginal Cost (MC):  Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as:"The cost that results from a one unit change in the production rate".

Marginal Cost = Change in Total Cost = ΔTC

                             Change in Output        Δq

Units of Output

Total Fixed Cost (TFC)    

Total Variable Cost (TVC)

Average Total Cost (ATC)

Average Fixed Cost (AFC)

Average Variable Cost (AVC)  

Marginal Cost (MC)         

($)

($)

($)

($)

($)

($)

1

30

15

45

30

15

15

2

30

16.9

23.4

15

8.4

1.9

3

30

18.4

16.1

10.1

6.1

1.5

4

30

19.4

12.3

7.5

4.8

1

5

30

20

10

6

4.0

0.6

6

30

22

8.7

5

3.7

2

7

30

25

7.8

4.3

3.6

3

8

30

30

7.5

3.7

3.7

5

9

30

36

7.3

3.3

4

6

10

30

43

7.3

3

4.3

7

11

30

60

8.2

2.7

5.5

17

12

30

90

10

2.5

7.5

30

13

30

125

11.9

2.3

9.6

35

14

30

165

13.9

2.1

11.8

40

15

30

210

16

2

14.8

45

16

30

270

18.7

1.9

16.7

60

 

From the table, the reader can understand the relation of various types of costs to each other. We take, first of all, the relation of average total cost to marginal cost. As production increases, the average total cost and the marginal cost both begin to decrease.

 

The average total cost goes on decreasing up to the 9th unit and then after 10, it begins to rise. The marginal cost goes on falling up to 5th unit and then it begins to increase. So long as the average total cost does not rise, the marginal cost remains below it. When average total cost begins to increase, toe marginal cost rises more than the average total cost.

 Summing Up:

When average cost is falling, the marginal cost is always lower than the average cost.                       

When average cost is rising, marginal cost lies above AC and rises faster than AC.

The marginal cost curve must cut the average cost curve at the minimum point of AC.

 Average Variable Cost and Marginal Cost:

 The relation of average variable cost and marginal cost is also very clear from the diagram given below. The AVC goes on falling up to the 7th unit, and then it steadily moves upwards. On the other hand the marginal cost falls up to the 5th unit and then rises more rapidly than average variable cost.

 Diagram/Figure:

 

In the diagram (13.10) AFC, AVC, ATC and MC curves are shown. Here, units of production are measured along OX and cost along OY. ATC and AVC both fall in the beginning, reach a minimum point and then begin to rise. So is the case with the marginal cost

curve. It first falls and then after rising, sharply crosses through the lowest point of average variable cost and average total cost and rises.

Revenue Curves

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of 400 crores." Profits or net income generally imply total revenue minus total expenses in a given period.

· Total revenue is the total receipts of a firm from the sale of any given quantity of a product.

· It can be calculated as the selling price of the firm's product times the quantity sold,

· i.e. total revenue = price × quantity or

· letting TR be the total revenue function

· where Q is the quantity of output sold, and P(Q) is the inverse demand function (the demand function solved out for price in terms of quantity demanded).

In microeconomics, marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price. It can also be described as the change in total revenue divided by the change in the number of units sold.

MR = dTR/dQ

Average revenue per user (sometimes average revenue per unit) usually abbreviated to ARPU is a measure used primarily by consumer communications and networking companies, defined as the total revenue divided by the number of subscribers.

AR = TR\Q

TR-total revenue

Q-quantity of a commodity sold. 

Q.9: Plot a diagram showing Total cost, fixed cost and variable cost. Also describe each. (UPTU2010-11)

Ans:  The total cost of a firm in the short run is divided into two categories (1) Fixed cost and (2) Variable cost. The two types of economic costs are now discussed in brief.

(1) Total Fixed Cost (TFC): 

Total fixed cost occur only in the short run. Total Fixed cost as the name implies is the cost of the firm's fixed resources, Fixed cost remains the same in the short run regardless of how many units of output are produced. We can say that fixed cost of a firm is that part of total cost which does not vary with changes in output per period of time. Fixed cost is to be incurred even if the output of the firm is zero.

For example, the firm's resources which remain fixed in the short run are building, machinery and even staff employed on contract for work over a particular period.

(2) Total Variable Cost (TVC):   

Total variable cost as the name signifies is the cost of variable resources of a firm that are used along with the firm's existing fixed resources. Total variable cost is linked with the level of output. When output is zero, variable cost is zero. When output increases, variable cost also increases and it decreases with the decrease in output. So any resource which can be varied to increase or decrease with the rate of output is variable cost of the firm.

 For example, wages paid to the labor engaged in production, prices of raw material which a firm. incurs on the production of output are variable costs. A firm can reduce its variable cost by lowering output but it cannot decrease its fixed cost. These expenses remain fixed in the short run. In the long run there are no fixed resources. All resources are variable. Therefore, a firm has no fixed cost in the long run. All long run costs are variable costs.

(3) Total Cost (TC):           

Total cost is the sum of fixed cost and variable cost incurred at each level of output. Total cost of production of a firm equals its fixed cost plus its:

 Formula:

TC = TFC + TVC

 Where:

 TC = Total cost, TFC = Total fixed cost., TVC = Total variable cost.

Explanation: A short run cost of a firm is now explained with the help of a schedule and diagrams. 

(in Dollars)

Units of Output (in Hundred)

Total Fixed Cost

Total Variable Cost

Total Cost

0

1000

0

1000

1

1000

60

1060

2

1000

100

1100

3

1000

150

1150

4

1000

200

1200

5

1000

400

1400

6

1000

700

1700

7

1000

1100

2100

 

The short run cost data of the firm shows that total fixed cost TFC (column 2) remains constant at $1000/- regardless of the level of output.

 

The column 3 indicates variable cost which is associated with the level of output. Total variable cost is zero when production is zero. Total variable cost increases with the increase in output. The variable does not increase by the same amount for each increase in output. Initially the variable cost increases by a smaller amount up to 3rd unit of output and after which it increases by larger amounts.

 

Column (4) indicates total cost which is the sum of TFC + TVC. The total cost increases for each level of output. The rise in total cost is sharper after the 4th level of output. The concepts of costs, i.e., (1) total fixed cost (2) total variable cost and (3) total cost can be illustrated graphically.

 

(i) Total Fixed Cost Curve/Diagram:

 

 

In this diagram (13.1) the total fixed cost of a firm is assumed to be $1000 at various levels of output. It remains the same even if the firm's output is zero.

 

(ii) Total Variable Cost Curve/Diagram:

 

 

In the figure (13.2), the total variable cost curve (TVC) increases with the higher level of output. It starts from the origin. Then increases at a diminishing rate up to the 4th units of output. It then begins to rise at an increasing rate.

 

Total Cost Curve Curve/Diagram:

 

 

In the figure (13.3), total cost curve which is the sum of the total fixed cost and variable cost at various levels of output has nearly the same shape. The difference between the two is by only a fixed amount of $1,000. The total variable cost curve and the total cost curve begin to rise more rapidly as production is increased. The reason for this is that after a certain output, the business has passed its most efficient use of its fixed costs machinery, building etc., and its diminishing return begins to set in.

2 Explain the cost output relationship in the long run with the help of diagram.

Ans:

Q.10: What do you understand by diminishing returns to scale? What are the factors responsible for it? Discuss.

OR

Write a note on Law of returns to scale(UPTU2010-11)

Ans: Law of Returns to Scale:

 The laws of returns are often confused with the law of returns to scale. The law of returns operates in the short period. It explains the production behavior of the firm with one factor variable while other factors are kept constant. Whereas the law of returns to scale operates in the long period. It explains the production behavior of the firm with all variable factors.

 

There is no fixed factor of production in the long run. The law of returns to scale describes the relationship between variable inputs and output when all the inputs, or factors are increased in the same proportion. The law of returns to scale analysis the effects of scale on the level of output. Here we find out in what proportions the output changes when there is proportionate change in the quantities of all inputs. The answer to this question helps a firm to determine its scale or size in the long run.

 It has been observed that when there is a proportionate change in the amounts of inputs, the behavior of output varies. The output may increase by a great proportion, by in the same proportion or in a smaller proportion to its inputs. This behavior of output with the increase in scale of operation is termed as increasing returns to scale, constant returns to scale and diminishing returns to scale. These three laws of returns to scale are now explained, in brief, under separate heads.

 (1) Increasing Returns to Scale:

If the output of a firm increases more than in proportion to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale.

 For example, if the amount of inputs are doubled and the output increases by more than double, it is said to be an increasing returns to scale. When there is an increase in the scale of production, it leads to lower average cost per unit produced as the firm enjoys economies of scale.

 (2) Constant Returns to Scale:

 When all inputs are increased by a certain percentage, the output increases by the same percentage, the production function is said to exhibit constant returns to scale.

 For example, if a firm doubles inputs, it doubles output. In case, it triples output. The constant scale of production has no effect on average cost per unit produced.

 (3) Diminishing Returns to Scale:

The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs.

 For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale. In case of decreasing returns to scale, the firm faces diseconomies of scale. The firm's scale of production leads to higher average cost per unit produced.

 

Graph/Diagram:

 The three laws of returns to scale are now explained with the help of a graph below:

 

 

The figure 11.6 shows that when a firm uses one unit of labor and one unit of capital, point a, it produces 1 unit of quantity as is shown on the q = 1 isoquant. When the firm doubles its outputs by using 2 units of labor and 2 units of capital, it produces more than double from  q = 1 to q = 3.

 

So the production function has increasing returns to scale in this range. Another output from quantity 3 to quantity 6. At the last doubling point c to point d, the production function has decreasing returns to scale. The doubling of output from 4 units of input, causes output to increase from 6 to 8 units increases of two units only. 

Q.11: What do you understand by economies and diseconomies of scale? Explain.

· Ans An increase in output causes LRATC to decrease

· The more output produced, the lower the cost per unit

· LRATC curve slopes downward

· Long-run total cost rises proportionately less than output

· Increasing return to scaleThe advantages of large scale production that result in lower unit (average) costs (cost per unit)

· AC = TC / Q

· Economies of Scale – spreads total costs over a greater range of output

· Internal – advantages that arise as a result of the growth of the firm

· Technical

· Commercial

· Financial

· Managerial

· Risk Bearing

· The disadvantages of large scale production that can lead to increasing average costs

· Problems of management

· Maintaining effective communication

· Co-ordinating activities – often across the globe!

· De-motivation and alienation of staff

· Divorce of ownership and control

Q.12: Complete the table:

Units of Output

Total Fixed Cost (TFC)    

Total Variable Cost (TVC)

Average Total Cost (ATC)

Average Fixed Cost (AFC)

Average Variable Cost (AVC)  

Marginal Cost (MC)         

($)

($)

($)

($)

($)

($)

1

30

15

45

30

15

15

2

30

16.9

23.4

15

8.4

1.9

3

30

18.4

16.1

10.1

6.1

1.5

4

30

19.4

12.3

7.5

4.8

1

5

30

20

10

6

4.0

0.6

6

30

22

8.7

5

3.7

2

7

30

25

7.8

4.3

3.6

3

8

30

30

7.5

3.7

3.7

5

9

30

36

7.3

3.3

4

6

10

30

43

7.3

3

4.3

7

11

30

60

8.2

2.7

5.5

17

12

30

90

10

2.5

7.5

30

13

30

125

11.9

2.3

9.6

35

14

30

165

13.9

2.1

11.8

40

15

30

210

16

2

14.8

45

16

30

270

18.7

1.9

16.7

60

Long-Run Average Total Cost

For each output level, firm will always choose to operate

on the ATC curve with the lowest possible cost

LRATCATC

1

Use 0 automated lines

ATC

3

ATC

0

CBAATC

2

DE175196184Dollars1.002.003.00$4.00Units of Output30901301612503000

Use 1 automated linesUse 2 automated linesUse 3 automated lines

Long-Run Average Total CostFor each output level, firm will always choose to operate on the ATC curve with the lowest possible cost

LRATC

ATC1

Use 0 automated lines

ATC3

ATC0

C

B

A

ATC2

D

E

175

196

184

Dollars

1.00

2.00

3.00

$4.00

Units of Output

30

90

130

161

250

300

0

Use 1 automated lines

Use 2 automated lines

Use 3 automated lines

78