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Economies of Scale: Cost Curves and Output

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Industry studies often suggest that firms may have long-run average cost curves that show some output range over which there are economies of scale and a wide range of output over which long-run average cost is constant; finally, at very high output, there are diseconomies of scale.

Draw a representative long-run average cost curve, and indicate the minimum efficient scale.

Would you expect that firms in an industry like this would all produce about the same level of output? Why?

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Solution Preview

This is the long-run concept of return to scale. In the long run all factors of productions can be decision variable, including the size of factory.

First, you should draw a U-shaped long-run average cost curve -LRAC (refer to the attachment). there are three areas as shown in the graph:
1. Economies of scale (increasing return to scale): this is the area whereby the LRAC is declining. It means the average cost is declining as the scale or the size of operation increases. Remember in the long run or factors are variable, including capital. Therefore, the size ...

Solution Summary

This response discuses the concept of "the return to scale" as a long run concept. It looks at the the variables of long run factors of productions and the cost curve of such processes.

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See Also This Related BrainMass Solution

Production Costs

Problem:

a.Given the following chart and information fill in the missing values.

Output TFC TVC TC MC AFC AVC ATC
0 $2,000 --
50 100
100 80
150 60
200 50
250 60
300 85
350 125

b. Please graph your results. Draw both the average and total cases making sure to explain these important relationships or trends in the curves:

In the AVG Cost Curves:
i) Shape of AVC as Q increase
ii) AVC and ATC and Q increases
iii) U-shape of AVC and ATC

In Total Cost Curves
i) Shape of TFC, TVC/TC
ii) TC and TVC as Q increases (note: TC = TVC + TFC  this tells you something about distance between the two curves)

c. In a typical LRAC curve like the illustration below, explain economies and diseconomies of scales as well as constant returns to scale. Make sure to use the graph and explain the concept.

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