Question: Note: for this question you can refer to Figure 6 on page 248 of the text.

Please refer to PDF of figure 6

1. Show on a graph a set of "Average Costs Functions" (ATC) that depict "Economies of Scale", and indicate the optimal level of production (Q) for a company facing these cost functions. This would be the optimal Q for the optimal level of output.
2. Assume that the firm is operating at the optimal scale, with potentially the lowest ATC, as indicated in your answer above. What would happen to the firm’s costs if it ends up only being able to sell the quantity of output that is optimal for a smaller scale of operation? Show this graphically.

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