Downsizing is the practice of laying off workers in an attempt to decrease average total cost. Can laying off workers decrease average total cost? Is it possible for the firm to downsize and have its average total cost increase? Explain your answer
What will be an ideal response?
Yes, downsizing by laying off workers can decrease the firm's average total cost. And it is possible for a firm to downsize and increase its average total cost. Suppose that the firm initially is producing more output than the level that minimizes average total cost. In this case, downsizing by laying off workers decreases the amount of output the firm produces and the firm can move along its average total cost curve to a lower average total cost. However, the firm can lay off too many workers. If it lays off too many workers, it decreases its output so much that it moves along its average total cost curve enough that its average total costs wind up higher than they were initially.
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