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the law of diminishing marginal returns

Please provide assistance:

1). Explain the factors that may cause economies and diseconomies of scale. Give an example of each.

2). Explain the economic concept of the law of diminishing marginal returns. Please give an example. Why is this important?

3). Why is the equality of marginal revenue to marginal cost essential to profit maximization in all of the market structures? Explain the decision-making process when MR is greater than MC and when MC is greater than MC. Why does a manager want to operate at a capacity where MR=MC?

Solution Preview

1). Explain the factors that may cause economies and diseconomies of scale. Give an example of each.
The factors that cause economies of scale are the cost advantages that a firm gets because of increase in operations. These factors cause a decrease in the unit cost. These factors are technological example economies of scale, these advantages can be marketing like making a more efficient use of salespersons, financial like getting large loans at lower rates of interest, and purchasing like getting lower prices because of bulk buying,
The diseconomies of scale are caused by entirely different set of factors. The first diseconomy is because of inertia. Large enterprises cannot quickly change their methods and this leads to diseconomies. Second factor is communication cost. The cost of communication in a large operation is costly not merely in terms of dollars but also because of time take for communication. For instance, one employee in unit 1 may not be allowed to communicate with another employee in unit 2, the communication takes place through the supervisor. Diseconomy is caused by inelastic supply. ...

Solution Summary

the law of diminishing marginal returns is discussed in great detail in this solution.

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