a) Explain two reasons why South Korean cars are cheaper than other car makers.

In the long-run, a firm can change all its inputs. It can built a larger firm or increase the number of its
machines. In the long-run firms can choose the most efficient size or scale of production.

The two reasons South Korean cars are cheaper than other car makers are higher output volume and
lower cost of production.
This can be explain based on the slope below.

Cost

C0 LAC

C1

Q011 Producti
on
When LAC curve decreases from C0 to C1, the output volume of the cars increases from Q0 to Q1,
the firm experiences increasing returns to scale or economies of scale.
When LAC curve remains unchanged as output volume of the cars increases, the firm experiences
constant returns to scale.
If LAC curve increases from C1 to C0, the output volume of the cars increases from Q1 to Q2, the
firm experiences decreasing returns to scale or diseconomies of scale.

When the car manufacturer are able decrease the average cost by increasing the labour efficiency and
increase the levels technology in manufacturing, the higher output volume of the cars can be
produced. While when the average cost is increase, the output volume of the cars will increases and if
this continues, it will lead to the damaged of the machine, cost per unit to repair the machine is high.