A firm's capacity is defined as the level of output where
A)the upper limit on what can be produced is reached.
B)average total cost is at its maximum.
C)marginal cost equals average variable cost.
D)average fixed costs are at a minimum.
E)short-run average total cost is at its minimum.

Question

Quizplus · Accepted Answer

Capacity is the level of output at which short-run average total cost is at its minimum. This is because producing below capacity would mean having idle resources and higher average costs, while producing above capacity would require additional costs to be incurred and lead to higher average costs as well. Therefore, firms aim to operate at their optimal level of capacity to minimize costs and maximize profits.

A Firm's Capacity Is Defined as the Level of Output