Suppose Argyle Sachs has to choose between building a smaller sweater factory and a larger sweater factory. In the following graph, the relationship between costs and output for the smaller factory is represented by the curve ATC1, and the relationship

between costs and output for the larger factory is represented by the curve ATC2.

a. If Argyle expects to produce 3,600 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain?
b. If Argyle expects to produce 5,000 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain.
c. If the average cost of producing sweaters is lower in the larger factory when Argyle produces 6,500 sweaters per week, why isn't it also lower when Argyle produces 4,000 sweaters per week?

a. Argyle's costs will be lower with a smaller factory.
b. Argyle's costs will be lower with a larger factory.
c. Economies of scale often take the form of a larger factory allowing for lower average cost for a large quantity, but actually higher average cost for a smaller quantity.