Which plant size, or which short-run average cost curve should the firm construct?
The firm will want to build the factory that will give it the lowest SRAC for the production range it believes it will face for the life of the plant. Therefore, the firm must predict future demand for its product, at least for the life of the plant. 2. What is the significance of quantities where the SRAC’s cross? Answer: These are the “switching levels” of output. If the firm believes output in the future will be between 0 and the quantity where the first two SRAC’s cross, it will want to build the smallest plant. [Eighth’s week graph in the GRAPHS section of website.] If output is predicted to be between q* and q**, on the diagram shown in the Eighth’s week graph in the GRAPHS section of the website, then the plant with SRAC2 is the best plant to build. Finally, if output is predicted to be above q**, then the firm will want to build the plant with SRAC3 on the diagram shown in the Eighth’s week graph in the GRAPHS section of the website. The firm estimates output by estimating long
