Question

Give an example of a firm that you would expect to have increasing returns to scale. How about decreasing returns to scale? Give your reasoning.

Answer 1

Increasing and Decreasing Returns to scale ;

A Firm is experiencing increasing returns to scale if the average cost per unit produced decreases as the number of units produced increases.On the other hand,there are decreasing returns to sccale if the average cost is increasing as the number of units produced increases.

Answer and Explanation

1. Most firms experience increasing returns to scale. For example, a Home Building Company will experience increasing returns to scale because of the discounts they will receive on purchasing large quantities.As the number of homes built increases, the firm will need to purchase larger and larger quantities of materials.In doing so, they will receive bigger discounts because most suppliers offer lower per-unit costs as the number of units purchased increased.This, in turn, will result in a lower average cost per home produced.
2. While most firms are able to take advantage of increasing returns to scale, there are some that experience decreasing returns.For example, Firms that Mine Natural Resources will see Higher average costs as the quantities they mine increase. This is because natural resources are of a finite amount.Therefore, as the amount of mined increases, it will take longer and longer to find more. Therefore the average cost will increase .