help!!!!!!! Q2 In each of the following cases, explain what kind of returns to s

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help!!!!!!!

Q2

In each of the following cases, explain what kind of returns to scale you think the firm will experience

and why. (that is, increasing, constant or decreasing?)

a. A telemarketing firm in which employees make sales calls using computers and telephones.

b. An interior design firm in which design projects are based on the expertise of the firm’s owner.

c. A diamond-mining company.

d. For a perfectly competitive firm, marginal revenue equals __________________, and to maximize

profit, the firm produces the quantity at which ____________________ equals _____________________.

e. The market price for wheat is $5. If a farmer's marginal cost is $7, the farmer should produce

__________________ (more/less) output.

f. At the current output level, a farmer's marginal cost of producing sugar is $0.30. If the price of sugar is

$0.22 per pound, the farmer should _______________ (increase/decrease) production. If the price of

sugar is $0.32 per pound, the farmer should _______________ (increase/decrease) production.

g. Marginal Airlines runs 10 flights per day at a total cost of $50,000: $20,000 for flight crews and

food service, and $30,000 in fixed costs for airport fees and the reservation system.

h. If an 11th flight would have 25 passengers, each paying $100, would it be sensible to run the

flight?

b. If the 11th flight would have only 15 passengers, would it be sensible to run the flight?

Explanation / Answer

a. Constant Returns to scale because a telemarketing firm face constant charges of telephone per call, wage to telephone callers employed is the same.

b. Diseconomies of scale as an interior design firm in which design projects are based on the expertise of the person. Firm incurs more cost when it hires more workers which posses the required skill. Due to this firm devote many of its productive hours on the searching of workers or on hiring of employees.

c. Diamond-mining company will face economies of scale because with the expansion of scale it will see fall in their cost of common facilities of equipment repairing, purchase of raw materials, greater flexibility in transportation required in the mining property, etc. Costs on all these will rise less than in proportion of scale.

d. For a perfectly competitive firm, marginal revenue equals Price and Average Revenue , and to maximize

profit, the firm produces the quantity at which Marginal Revenue equals Marginal Cost.

e. The market price for wheat is $5. If a farmer's marginal cost is $7, the farmer should produce

less output.

f. At the current output level, a farmer's marginal cost of producing sugar is $0.30. If the price of sugar is

$0.22 per pound, the farmer should increase production. If the price of sugar is $0.32 per pound, the farmer should decrease production.

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