Now let us think about economies of scale as well as the difference between the
ID: 1106381 • Letter: N
Question
Now let us think about economies of scale as well as the difference between the short-run and long-run by considering the table below which gives the costs of producing different quantities of Flip-Flops
Total Variable cost
Number of Machines
Fixed Cost
10 Flip-Flops
20 Flip-Flops
30 Flip-Flops
1
$200
$400
$1200
$1700
2
$500
$300
$700
$1300
3
$900
$100
$400
$1000
Answer whether each of the following are True/False and clearly explain your conclusion.
This firm exhibits constant returns to scale.
If this firm uses 2 machines to produce 20 Flip-Flops the total cost is $700.
If this firm is using 2 machines to produce 10 Flip-Flops then the firm is in the Short-Run.
Total Variable cost
Number of Machines
Fixed Cost
10 Flip-Flops
20 Flip-Flops
30 Flip-Flops
1
$200
$400
$1200
$1700
2
$500
$300
$700
$1300
3
$900
$100
$400
$1000
Explanation / Answer
We need to find total cost and then the average total cost. TC = TVC + FC and ATC = TC/Q. Q is 10, 20, and 30
TVC
TC
ATC
Number of Machines
Fixed Cost
10 Flip-Flops
20 Flip-Flops
30 Flip-Flops
TC for 10 Flip flops
TC for 20 Flip flops
TC for 30 Flip flops
ATC for 10 Flip flops
ATC for 20 Flip flops
ATC for 30 Flip flops
1
200
400
1200
1700
600
1400
1900
60
140
190
2
500
300
700
1300
800
1200
1800
80
120
180
3
900
100
400
1000
1000
1300
1900
100
130
190
Now find that the long run ATC is the minimum of short run ATC and it is 60, 120 and 180 for Q = 10, 20, and 30. Note that ATC is rising so there are diseconomies of scale. So the statement that This firm exhibits constant returns to scale is FALSE
For 2 machines and 20 flipflops, the TC is 1200. Hence it is not 700 and the statement is false.
If this firm is using 2 machines to produce 10 Flip-Flops then the firm is in the Short-Run. This statement is true. Note that for 2 machines and Q = 10, short run cost is $80 while long run cost is minimum at $60 for using 1 machine. This implies if firm has to produce 10 flip flops, the cost is minimized at 1 machine in long run.
TVC
TC
ATC
Number of Machines
Fixed Cost
10 Flip-Flops
20 Flip-Flops
30 Flip-Flops
TC for 10 Flip flops
TC for 20 Flip flops
TC for 30 Flip flops
ATC for 10 Flip flops
ATC for 20 Flip flops
ATC for 30 Flip flops
1
200
400
1200
1700
600
1400
1900
60
140
190
2
500
300
700
1300
800
1200
1800
80
120
180
3
900
100
400
1000
1000
1300
1900
100
130
190
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