Explain graphically cost behaviour in a differant size plant?
A profit-maximizing firm always aims to minimize its input cost subject to output constraint. In the short run a firm uses both fixed and variable inputs while in the long run all factors employed by the firm are variable. So a change in plant size implies changes in scale of operations which takes place in the long run when all factors are changed simultaneously.
Again, a firm’s cost function initially increases at a declining rate and then increases at a increasing rate. Thus correspondingly, MC is U-shaped which implies that first the cost decreases, reaches a minimum point and the falls. This shape is also defined by - economies of scale (experienced by initial stage due to specialization and division of labor) and diseconomies of scale (experienced by later stage due to poor management and increased competition for resources).
Given the output level, a rational firm hires that level of inputs such that its cost is minimized.
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