1. IndustryA has the following cost curve: C(Q)=100 + 4Q² Therefore: AC(Q)=100/Q + 4Q The diagram shows that the average costs is initiallydeclining until the point of MES (Minimum Efficient Scale).
This shows thatfirms enjoy economies of scale until point MES, however, the average coststarts increasing if production exceeds the MES point. Hence, it results indiseconomies of scale which implies to the fact that Industry A is not amonopoly. 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 costis decreasing initially until the point of MES which implies that firms areenjoying economies of scale until that point. After the point of MES, theaverage cost curve is flat/constant which implies MES is infinite. Thusindustry B is more likely to be a monopoly. 2. Thecost curve of the firm is: C(Q)= 40 +8Q + Therefore: AC(Q) = 40/Q + 8 + 1/ a) Thisgraph illustrates that firms enjoy economies of scale because the average costcurve is declining until the point of MES, after which the average cost curveflattens out.
There is no constraint on how much can be extracted from theinput because average cost curve does not increase and is constant, whichimplies that firms enjoy economies of scale. b) TheMinimum Efficient Scale is the lowest level of product at which the averagecost is minimized. In this graph it is infinity since the AC gradually keepsdecreasing as the quantity increases. The MES of the firm is infinite or doesnot 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 fallsas the volume of output increases. We can figure out that the MES point is whenQ=10, thus the firm enjoys economies of scale up until that point.
After thatpoint, the firm experiences diseconomies of scale as the average cost ofproduction starts rising. The lowest average cost is 14 which is achieved atthe point where Q=10. Q C(Q) Avg. Cost 0 50 0 1 54.
5 54.5 2 60 30 10 140 14 20 330 16.5 4) a. We can see from the given datathat this firm does experience economies of scale. The cost per unit of making50 units of Y is $2, whereas if we make 100 units of Y, the cost per unit fallsto $1.8, thus indicating economies of scale. On the other hand, with X, thecost per unit of making 5 units of X is $30. Whereas if we make 10 units, theper 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 twodifferent goods is lower when a single firm produces them instead of twoseparate firms producing the goods separately. This production technology does not exhibiteconomies of scope, as the cost is cheaper when goods X and Y are producedseparately. The cost of making 50 units of Y is $100, and the cost of making 5units of Y is $150. Therefore, the total cost of producing goods X and Yseparately is $250. On the other hand, the cost of producing the goods X and Ytogether 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 ofproducing goods X and Y separately to $455. On the other hand, the cost ofproducing the goods X and Y together in the same quantities is $500. Since the costof producing goods X and Y is cheaper separately than it is together, theproduction technology does not exhibit economies of scope.
5) a) 6. Explain the effect that the adoption of theassembly line in the early 20th century had on the size of firms in NorthAmerica.The adoption of assembly line has been a pinnaclepoint for all industrialists in the 20th century. Assembly line whichstems from the notion of mass production has revolutionized the manufacturingindustry in a positive way. The first assembly line was pioneered by Henry Fordin 1913, when a conveyer belt was used for flying magnetos. The production timewas reduced from 18 minutes to 5 minutes per magnet. Assembly line has had manypositive financial impacts on firms that used it. The cost of production wassignificantly reduced as labor costs and production time was minimizedsignificantly.
The quality of products was maintained without any flaw and thevolume of production has increased significantly. Hence, the introduction ofassembly line has increased the output of firms, which increased the size offirms in the 20th century. Now firms are able to enjoy economic ofscale because they save proportionately on production cost with an increasedlevel of production.
Firms have grown bigger in terms of output and qualitycontrol in North America dur to the adoption of assembly lines. 7. Provide examples of firms/industries for each ofthe following (do not use examples discussed in class) and briefly justify yourexamples: (a) Diseconomies of Scale: The automobile industrywould be a good example to show diseconomy of scale. Diseconomy of scale occurswhen marginal cost increases with increased production. In the automobilesector, the logistical cost of transporting finished cars to distant locationsmight be high enough to offset any economies of scale. Hence, when cars aremade more in numbers, the cost may actually increase significantly which maycause diseconomies of scale. (b) Economiesof 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 tothe cube-square rule. According to this rule, the volume a structure increaseswith the cube of its linear dimension.
Hence, the volume of beer bottles can bemaximized to have more of beer in one bottle at a decreased cost of production.(c) A labour-intensive industry: Hospitality and foodservice industry would be good examples of labor intensive industry because thebusiness of hospitality relies on communication between the host and theconsumers, which makes it necessary for these types of industries to invest moreon people to increase their profit. (d) Acapital-intensive industry: Telecommunication industry would be a good exampleof a capital-intensive industry because the ratio capital to labor in thisindustry is high given the complexity of networking and towers required tofoster communication between people. (e) An industrythat uses significant amounts of both labour and capital: RMG (Ready madegarments) industry would be a good example because they use both labor andmachineries proportionately to complete production that stems from knitting,hand-stitching etc. 8. Explain how knowing the MES in a certain industrycan help to predict the average size and number of firms in that industry.
Isit ever the case that knowledge of the MES is no help at all in making thesepredictions?The minimum efficient scale is the least or smallestamount of production a company can achieve while completely maximizing theeconomies of scale. It is at this this point when the total average cost isminimized in the long run. If MES is relatively small compared to total marketsize, a lot of firms can exist. However, if the MES relatively high due to thehigher ratio of fixed cost, then only few big firms can exist within theindustry. For example, in the telecommunication industry the ratio of fixedcosts to variable costs is high, due to which a lot of firms can’t enterwithout big investment. MES tends to be high in these upscale industries due towhich 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 offirms. Similarly, if MES is infinite, the predicted size of frim is large.
the minimum efficient scale identifies apoint where the costs of production predicts the competitive price that aproduct can be offered at. The minimum efficient scale is a range of productionvalues, its relationship to the total market size or demand determines how manycompetitors can operate in the market. However, if MES is zero we can make nopredictions of the size or number of firms within the industry because itimplies firms have similar average cost at every output level, which would makeit hard to predict anything at all.