Assume that firms A and B have the same minimum efficient scale of ope

Assume that firms A and B have the same minimum efficient scale of operation and, at current production levels, both firms are incurring the same average costs of production. However, firm A’s output is 5 times larger than firm B’s output.

How is this possible?

ANSWER

The minimum efficient scale of operation simply refers to the level of output beyond which there are no more economies of scale, i.e., there is no further decline in long-run average costs as output is expanded. However, this does not mean that long-run average costs cannot then remain constant as the scale of operation increases. So long as long-run average costs are the same over a range of output, two firms could be operating at very different scales within that range and still incur the same average costs.