You are considering building a Rent Your Own Storage Centre. There is free entry

Question

You are considering building a Rent Your Own Storage Centre. There is free entry and exit in the industry and the services offered by the large number of storage firms are essentially identical. You may also assume that all the costs in the industry are fixed costs associated with the land and building required to provide storage services. You are trying to decide whether to build 50 storage units at total economic costs of $200,000, 100 storage units at a total economic cost of $300,000, or 200 storage units at a total economic cost of $700,000. If you wish to survive in the long run, which size will you choose?

Explanation / Answer

When Q = 50, average unit cost = $200,000 / 50 = $4,000

When Q = 100, average unit cost = $300,000 / 100 = $3,000

When Q = 200, average unit cost = $700,000 / 200 = $3,500

In the long run, with free entry and exit, a firm will be in equilibrium when it can produce at lowest average cost. Here, average cost is lowest for quantity of 100 units, therefore this size should be chosen.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.