A has the following cost curve: C(Q)
=100 + 4Q²
=100/Q + 4Q
The diagram shows that the average costs is initially
declining until the point of MES (Minimum Efficient Scale). This shows that
firms enjoy economies of scale until point MES, however, the average cost
starts increasing if production exceeds the MES point. Hence, it results in
diseconomies of scale which implies to the fact that Industry A is not a
Industry B has the following cost curve: C(Q) =100 + 4Q
Therefore: AC(Q) =100/Q + 4
From this diagram on the other hand, we know that average cost
is decreasing initially until the point of MES which implies that firms are
enjoying economies of scale until that point. After the point of MES, the
average cost curve is flat/constant which implies MES is infinite. Thus
industry B is more likely to be a monopoly.
cost curve of the firm is: C(Q)
= 40 +8Q +
Therefore: AC(Q) = 40/Q + 8 + 1/
graph illustrates that firms enjoy economies of scale because the average cost
curve is declining until the point of MES, after which the average cost curve
flattens out. There is no constraint on how much can be extracted from the
input because average cost curve does not increase and is constant, which
implies that firms enjoy economies of scale.
Minimum Efficient Scale is the lowest level of product at which the average
cost is minimized. In this graph it is infinity since the AC gradually keeps
decreasing as the quantity increases. The MES of the firm is infinite or does
not exist but can’t be zero.
3) The cost function of the firm is: C(Q)
= 50 + 4Q + 0.5Q²
Economies of scale occurs when the average cost per unit of output falls
as the volume of output increases. We can figure out that the MES point is when
Q=10, thus the firm enjoys economies of scale up until that point. After that
point, the firm experiences diseconomies of scale as the average cost of
production starts rising. The lowest average cost is 14 which is achieved at
the point where Q=10.
a. We can see from the given data
that this firm does experience economies of scale. The cost per unit of making
50 units of Y is $2, whereas if we make 100 units of Y, the cost per unit falls
to $1.8, thus indicating economies of scale. On the other hand, with X, the
cost per unit of making 5 units of X is $30. Whereas if we make 10 units, the
per unit cost falls to $27.5. Costs are going down as quantities increase,
therefore there is economies of scale.
b. Economies of scope exist whenever the total cost of producing two
different goods is lower when a single firm produces them instead of two
separate firms producing the goods separately.
This production technology does not exhibit
economies of scope, as the cost is cheaper when goods X and Y are produced
separately. The cost of making 50 units of Y is $100, and the cost of making 5
units of Y is $150. Therefore, the total cost of producing goods X and Y
separately is $250. On the other hand, the cost of producing the goods X and Y
together in the same quantities is $265.
Also, the cost of making 100 units of Y is $180,
and the cost of making 10 units of Y is $275. That brings the total cost of
producing goods X and Y separately to $455. On the other hand, the cost of
producing the goods X and Y together in the same quantities is $500.
Since the cost
of producing goods X and Y is cheaper separately than it is together, the
production technology does not exhibit economies of scope.
6. Explain the effect that the adoption of the
assembly line in the early 20th century had on the size of firms in North
The adoption of assembly line has been a pinnacle
point for all industrialists in the 20th century. Assembly line which
stems from the notion of mass production has revolutionized the manufacturing
industry in a positive way. The first assembly line was pioneered by Henry Ford
in 1913, when a conveyer belt was used for flying magnetos. The production time
was reduced from 18 minutes to 5 minutes per magnet. Assembly line has had many
positive financial impacts on firms that used it. The cost of production was
significantly reduced as labor costs and production time was minimized
significantly. The quality of products was maintained without any flaw and the
volume of production has increased significantly. Hence, the introduction of
assembly line has increased the output of firms, which increased the size of
firms in the 20th century. Now firms are able to enjoy economic of
scale because they save proportionately on production cost with an increased
level of production. Firms have grown bigger in terms of output and quality
control in North America dur to the adoption of assembly lines.
7. Provide examples of firms/industries for each of
the following (do not use examples discussed in class) and briefly justify your
(a) Diseconomies of Scale: The automobile industry
would be a good example to show diseconomy of scale. Diseconomy of scale occurs
when marginal cost increases with increased production. In the automobile
sector, the logistical cost of transporting finished cars to distant locations
might be high enough to offset any economies of scale. Hence, when cars are
made more in numbers, the cost may actually increase significantly which may
cause diseconomies of scale.
of scale due to a physical property of production such as the cube-square rule:
The brewing industry would be a good example to show economies of scale due to
the cube-square rule. According to this rule, the volume a structure increases
with the cube of its linear dimension. Hence, the volume of beer bottles can be
maximized to have more of beer in one bottle at a decreased cost of production.
(c) A labour-intensive industry: Hospitality and food
service industry would be good examples of labor intensive industry because the
business of hospitality relies on communication between the host and the
consumers, which makes it necessary for these types of industries to invest more
on people to increase their profit.
capital-intensive industry: Telecommunication industry would be a good example
of a capital-intensive industry because the ratio capital to labor in this
industry is high given the complexity of networking and towers required to
foster communication between people.
(e) An industry
that uses significant amounts of both labour and capital: RMG (Ready made
garments) industry would be a good example because they use both labor and
machineries proportionately to complete production that stems from knitting,
8. Explain how knowing the MES in a certain industry
can help to predict the average size and number of firms in that industry. Is
it ever the case that knowledge of the MES is no help at all in making these
The minimum efficient scale is the least or smallest
amount of production a company can achieve while completely maximizing the
economies of scale. It is at this this point when the total average cost is
minimized in the long run. If MES is relatively small compared to total market
size, a lot of firms can exist. However, if the MES relatively high due to the
higher ratio of fixed cost, then only few big firms can exist within the
industry. For example, in the telecommunication industry the ratio of fixed
costs to variable costs is high, due to which a lot of firms can’t enter
without big investment. MES tends to be high in these upscale industries due to
which we can predict that the number of firms will be less when MES is high.
The knowledge of consumer demand with the MES helps predict the number of
firms. Similarly, if MES is infinite, the predicted size of frim is large. the minimum efficient scale identifies a
point where the costs of production predicts the competitive price that a
product can be offered at. The minimum efficient scale is a range of production
values, its relationship to the total market size or demand determines how many
competitors can operate in the market. However, if MES is zero we can make no
predictions of the size or number of firms within the industry because it
implies firms have similar average cost at every output level, which would make
it hard to predict anything at all.