if redstone clayworks company want to minimize their average total cost how many units should they produce?
To determine the number of units that Redstone Clayworks Company should produce to minimize their average total cost, we need to look at the concept of economies of scale. Economies of scale refer to the cost advantages that a company can achieve by increasing its production level.
The average total cost (ATC) is calculated by dividing the total cost by the quantity produced. The ATC curve shows the relationship between the quantity produced and the average cost per unit.
To find the quantity of units that minimizes the average total cost, Redstone Clayworks Company needs to find the point where the ATC curve is at its lowest point. This point is known as the minimum point on the cost curve, or the minimum efficient scale.
Here are the steps to determine the number of units Redstone Clayworks Company should produce:
1. Calculate the average total cost (ATC) for different quantities of production. Calculate the total cost by adding up both fixed costs (costs that do not change with production level) and variable costs (costs that change with production level).
2. Plot the ATC curve using the calculated average total costs for each quantity of production. The ATC curve is U-shaped, indicating that initially, average costs decrease with increasing production due to economies of scale, and then they start to rise due to diseconomies of scale.
3. Identify the point on the ATC curve where the average total cost is at its lowest. This is the point where Redstone Clayworks Company should produce to minimize their average total cost.
4. Determine the corresponding quantity of units at the lowest point on the ATC curve. This is the optimal production level for Redstone Clayworks Company to minimize their average total cost.
It's important to note that the optimal production level may vary over time due to changes in costs, market demand, and other factors, so Redstone Clayworks Company should regularly review and update their production strategy to remain cost-efficient.
By analyzing the average total cost curve, Redstone Clayworks Company can determine the number of units to produce in order to minimize their average total cost and achieve cost efficiency.