The table below presents data regarding a particular firm that is considering ex

Question

The table below presents data regarding a particular firm that is considering expanding its scale of production. The data contains rough estimates of costs associated with four different plant sizes. TC- estimate of annual total cost; Q - estimate of the quantity the plant will produce annually. | Scale #2 | Scale #4 | Scale #3 800,000 Scale #1 0,000$1,000,000$2,000,000 100,000 $5,000,000 1,500,000 Total Cost (TC) Output (O 9. Average cost for the firm at a scale of production of 400,000 units is 400,000 b. $0.25 c. $2.50 d. $0.40 a. $4.00 Moving from scale #1 to scale #2 will generate for the firm: a economies of scale since long-run average costs fall. b. economies of scale since long-run average costs rise c. disecon d. diseco 10, omies of scale since long-run average costs fall. nomies of scale since long-run average costs rise.

Explanation / Answer

9..)

Average cost for a firm when Q = 4 00, 000

AC = TC/Q

= 1,000 , 000 / 400, 000

= 2.5

10)

AC when Q = 100 000

AC = 5,00000/100000

= 5

AC when Q = 4,00,000

AC = 10 00000 / 40000

      = 2.5

Average cost of production has decreased, hence economies of scale exists here.

Right answer is : (A)

            

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