Question

1) Suppose that long-run average cost increases from 50 to 75 when output increases from 10 to 20. Is the firm experiencing economies of scale, diseconomies of scale, or constant returns to scale.

The firm is experiencing ________________________________________.

2) Which of the four basic market structures best describes the market for hardware where you live? This is the market where you purchase nails, fertilizer,

Answer 1

1) Economies of scale- When the firms increase their size of production i.e., increase their scale of production, they get some advantages or economies of production . Economy means saving in per unit cost as output increases. When a firm experiences economies of scale, per unit cost ( average cost) decreases as output increases.

Diseconomies of scale- When the scale of production becomes excessively large, certain disadvantages or diseconomies accrue to the firm. Diseconomy means dissaving in per unit cost as output increases. When a firm experiences diseconomies of scale, per unit cost( average cost) increases as output increases.

Constant returns to scale- When an increase in the output increases the per unit cost by same amount i.e., per unit cost ( average cost) remains the same, then the firm is experiencing constant returns to scale.

Long run average cost increases from 50 to 75 when output increases from 10 to 20. Hence, in an increase in output from 10 to 20, the long run average cost has increased.Hence, when output is increased, there is dissaving in per unit cost. Hence, the firm is experiencing DISECONOMIES OF SCALE.