4. Which is more economical, a plant with a payroll of $400 a week, with $100 of

Question

4. Which is more economical, a plant with a payroll of $400 a week, with $100 of overhead, and with an output of 100 units per week, or a plant with a payroll of $80,000 a week, an overhead of $100,000 a week, and an output of 50,000 units per week?

5. How do you explain economies of large-scale production? Why do certain business, such as cigarette manufacture, seem to enjoy them, whereas other business, such as barbering, do not?

8. Compare the situations of a farmer selling his wheat crop and an auto company executive selling his car "crop." What are the major forces that bear on each, when it comes to pricing the output?

Explanation / Answer

4.
To find out which is more economical, we need to find the per unit cost.

1st plant: Average cost = (400 + 100)/100 = $5 per unit
2nd plant: Average cost = (80000 + 100000)/50000 = $3.6 per unit

Thus, the 2nd plant is more economical as it is able to produce each unit at a lower average cost.

5. Economies of scale is the benefit of mass production on a large scale, which leads to a low average cost per unit. The economies of scale generally applies to those industries which have a large fixed cost initially but as the production increases, the fixed cost that gets divided over the units decreases. For a business such as barbering, the fixed costs aren't very high and there is a limit on the number of haircuts that a barber can do. Thus, the economies of large scale production do not apply to such businesses.

8. Wheat is a commodity where the market is huge, but each individual buyer/seller is relatively very small. Thus, an individual farmer will have little influence on the market price, and will be a "price taker". Additionally, wheat crop is considered to be a "homogeneous product", i.e wheat produced by one farmer is considered essentially same as wheat produced by another farmer.

Cars are not a homogeneous product, as each manufacturer has their own brands, and nameplates with each having different features. The market has a small number of car manufactures but millions of buyers. Thus, the manufacturers are not price takers, and can lower/increase their prices as per their whim.

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