Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing (constant, decreasing, increasing, increasing then decreasing, decreasing then increasing) returns to scale?

increasing then decreasing

Explanation:

production level            total cost             average total cost

4,000                               $8,000                    $2.00

4,200                               $8,200                     $1.95

4,400                               $8,800                    $2.00

Returns to scale measure the change in productivity, or how much input is needed to produce a unit of output.

increasing returns to scale: output increases in a greater proportion than inputsconstant returns to scale: output increases in the same proportion as inputsdecreasing returns to scale: output increases in a lower proportion than inputs

Since first the average total cost decreased, total output increased in a greater proportion than inputs ⇒ increasing returns of scale. But then the situation reversed and total output increased in a lower proportion than inputs ⇒ decreasing returns of scale.

$2,000  long term capital gain

Explanation:

As per the data given in the question,

Stock basis = $10,000

At the end stock basis = 0

Basis reduced to = $8,000

Operating income = $10,000

Company makes distribution = $8,000

Here, The distribution will be reduced from stock basis

= $10,000 - $8,000

= $2,000 long term capital gain  

Hence, he states that it leaves $2,000 as stock basis.