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diseconomics of scale

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

a. draw a representative long run average cost curve and indicate the minimum efficient scale
b. Would you expect that firms in an industry like this would all produce about the same level of output? Why?

2. Each of the following statements describes a market structure. What would you expect the long run average cost curve to look like for a representative firm in each industry? Graph the curve, and indicate the minimum efficient scale (MES)

a. There are a few large firms in the industry
b. There are many firms in the industry, each relative to the size of the market

3. For each of the following technologies, graph a representative set of isoquants

a. Every worker requires exactly one machine to work with, no substitution is possible
b. Capital and labor are perfect substitutes
c. The firm is able to substitute capital for labor, but they are not perfect substitutes

Solution Preview

Refer to attachment Q1a2ab for questions 1a, 2b, and 2c.
1a) Point A on this graph represents the minimum efficient scale, which is where the LR ATC curve reaches its minimum. At production production quantities below the efficient scale (on the downward sloping portion) on the ATC curve, the firm is operating with economies of scale. At production quantities above the efficient scale (on the upward sloping portion) on the ATC curve, the firm is operating with diseconomies of scale.

1b) Firms in competitive ...

Solution Summary

Diseconomics of scale are reiterated.