Question

If the quantity of coffee-drink produced per hour (regular day hour) at a company and the costs of production are given as shown in the table below, do you think that Starbucks is experiencing economies of scale? Why or why not?   

Output per hour	Total Costs	Fixed Costs	Variable Costs	ATC	MC	TR	MR
1	2.2	2	0.2
2	2.5	2	0.5
3	2.8	2	0.8
4	3.1	2	1.1
5	3.4	2	1.4
6	3.7	2	1.7
7	4	2	2
8	4.3	2	2.3
9	4.6	2	2.6
10	4.9	2	2.9

If the price of a coffee-drink is $6, what is the quantity that maximize company profit?

Answer 1

We can develop following schedule based upon the information given.

Formulas are indicated in the header of the following table.

Output per hour, Q	Total Costs, TC	Fixed Costs, FC	Variable Costs, TVC	ATC=TC/Q	MC=Change in TC /Change in Q	TR=P*Q	MR=P
1	2.20	2.00	0.20	2.20	0.20	6.00	6.00
2	2.50	2.00	0.50	1.25	0.30	12.00	6.00
3	2.80	2.00	0.80	0.93	0.30	18.00	6.00
4	3.10	2.00	1.10	0.78	0.30	24.00	6.00
5	3.40	2.00	1.40	0.68	0.30	30.00	6.00
6	3.70	2.00	1.70	0.62	0.30	36.00	6.00
7	4.00	2.00	2.00	0.57	0.30	42.00	6.00
8	4.30	2.00	2.30	0.54	0.30	48.00	6.00
9	4.60	2.00	2.60	0.51	0.30	54.00	6.00
10	4.90	2.00	2.90	0.49	0.30	60.00	6.00

We can see that Marginal Cost is same for given output levels.

Marginal Cost is less than ATC for all of given output levels. It means that marginal cost curves lies beneath average cost curve in the given output range. It means that firm is experiencing economies of scale in the given output range.

A competitive firm increases its output level as long as Marginal Cost is less than price or Marginal Cost is equal to price. In this case we observe that MC is less than price for given output range.

So, firm should produce output level of 10 units per hour to maximize profits.

(We are not given any information about any output level above 10 units, our analysis is based upon given information only)