Answer: Efficient scale occurs at an output level of less than 100.
Explanation:
Given,
Average Revenue (P) = $10,
Quantity (Q) = 100,
Average Total Cost (ATC) = $8
Fixed Cost (FC) = $200
Profit (π) = (P - ATC)×Q
= ($10 - $8)×100
= $200
In a competitive market,
MR = MC.
∵ Marginal revenue equals Marginal cost, Therefore MC = $10.
Average fixed costs (AFC) = [tex]\frac{FC}{Q}[/tex]
= [tex]\frac{200}{100}[/tex]
= $2
Average variable cost = Average total cost - Average fixed cost
= $8 - $2
= $6
Here average total cost is less than the marginal cost and it must be increasing. The efficient scale of the firm occurs when the price is set at minimum average cost.
Hence, efficient scale occurs at an output level of less than 100.
