Now assume that you are considering expanding your company by buying more capita

Question

Now assume that you are considering expanding your company by buying more capital goods (buildings, machines, and tools). If your company were larger (meaning that it had more capital goods), total fixed cost would increase from $180,000 to $210,000. However labor costs would decrease because the capital goods that you purchased would reduce your need for workers. Therefore, your total variable cost would decrease by $5,000 per home, as shown in the table. Quantity Total Variable Cost Total Fixed Cost Total Cost $155,000 290,000 405,000 540,000 695,000 870,000 1,065,000 1,280,000 1,515,000 1,770,000 210,000 $210,000 365,000 500,000 210,000 615,000 210,000 750,000 210,000 905,000 210,000 1,080,000 210,000 1,275,000 210,000 1,490,000 210,000 1,725,000 210,000 1,98,000 210,000 210,000 10 6.4. In the previous question, you learned that, beyond a certain quantity of homes, t is cheaper to produce with a large company (that is,with more capital goods) than with a small company, When a company can lower its cost per house by acquiring capital and becoming larger, we say that the company is experiencing: O A. Economies of scope B. Constant returns to scale OC. Diseconomies of scale O D. Economies of scale E. Minimum efficient scale

Explanation / Answer

Ans:

Economies of scale

Economies of scale is the competitive advantage  that large entities have over smaller entities. The advantage is that as business becomes larger, it costs lower to produce. As quantity produced increases then per unit fixed costs is lower and variable costs per unit is also reduced because of operational efficiencies in case of large entities.

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