A computer company’s cost function, which relates its average cost of production (AC) to its cumulative output in thousands of computers (CQ) and its plant size in terms of thousands of computers produced per year (Q), within the production range of 10,000 to 50,000 computers is given by
AC = 10 – 0.1(CQ) + 0.3(Q)
Is there a learning curve effect? Are there economies or diseconomies of scale? During its existence, the firm has produced a total of 40,000 computers and is producing 10,000 computers this year. Next year it plans to increase its production to 12,000 computers. Will its average cost increase or decrease? Explain.