Chapter 7.3, Problem 4R

To determine

To explain the significance of the cost curves and their difference with each other.

Explanation of Solution

Cost curves: It shows the relationship between the output levels & the input costs involved in the production.

The four figures explain about the possible shapes of the cost curves which involve the constant return to scale, decreasing returns to scale, increasing returns to scale & the efficient scale.

The constant returns to scale differ from others and is significant as it shows the proportional use of the output and the input used. In this case, the prices remain constant, so that the relationship between the factors are directly proportional & it forms a straight line which passes through the origin.

Considering the decreasing and increasing returns to scale, in the decreasing returns, if the output increases then there is a large requirement of inputs to be increased. Increasing outputs increase the cost of the inputs used & so it forms a convex cost curve. On the other hand, increasing returns to scale, considering the increase in output, the input requirement declines which decreases the overall cost & the cost curve takes the shape of a concave curve.

Efficient scale is the point where the firm has both increasing & decreasing returns to scale. This is done through the efficiency in production maintained by the managers where the concave part of the curve shows the increasing returns & the convex part shows the decreasing returns to scale.