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Economies of Scale

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When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is _______ customers served per hour.
a) 15
b) 30
c) 20
d) 25

Suppose that in 1999 ABC Corp produced 500 million units of a good at an average cost (LAC) of $2 and in 2000 ABC Corp expanded its plant capacity and produced 600 million units at an average cost (LAC) of $1.80. In this range, one can conclude that ABC Corp is experiencing:

a) Economies of Scale
b) Diseconomies of scale
c) Constant returns to scale
d) Diminishing returns

Joe's Butcher Shop is producing where MR = MC. Joe's Butcher Shop must be

a) earning a zero economic profit
b) incurring a loss.
c) maximizing profits
d) maximizing revenue but not maximizing profits

Marginal cost intersects average variable cost

a) when average variable cost is increasing
b) when average variable cost is decreasing
c) at the lowest point of MC
d) at the lowest point of AVC
e) None of the above; they do not intersect

Refer to the table below. Diminishing marginal returns set in with the addition of the:

Workers Total Output
0 0
1 10
2 30
3 44
4 55
5 60
6 60
7 55
a) third worker
b) fourth worker
c) fifth worker
d) sixth worker
e) unable to be determined from the information given

A firm will begin to experience diminishing returns at the point where

a) marginal cost increases.
b) marginal cost decreases
c) marginal product increases
d) both b and c

The minimum efficient scale of a plant is one that

a) avoids diminishing returns
b) minimizes long run average costs.
c) creates diseconomies of scale
d) allows firms to earn a normal rate of return

The shut-down point for a perfectly competitive firm is

a) the lowest point on the ATC curve.
b) the point at which a firm s long-run supply curve ends
c) the lowest point on the AVC curve
d) the lowest point on the marginal cost curve

Assume that a computer company operates in a perfectly competitive market producing 5,000 computers per day. At this output level, price exceeds this firm s marginal cost. It follows that producing one more computer will case this firm s

a) total cost to decrease
b) profits to increase
c) profits to decrease
d) profits to remain unchanged

A firm in a perfectly competitive industry is producing 50 units, its profit-maximizing quantity. Industry price is $2, total fixed costs are $25, and total variable costs are $40. The firm's economic profit is

a) $15
b) $30
c) $35
d) $60

Assume that the market for beef is perfectly competitive. Beef producers are currently earning a zero economic profit. If consumers switch from beef to chicken, which of the following is most likely to occur?

a) Beef producers will now incur economic losses in both the short run and the long run
b) Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining are earning a zero economic profit
c) Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining are earning an economic profit
d) Beef producers will now earn economic profits in the short run and there will be no additional adjustments in the long run.

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Solution Preview

When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is _______ customers served per hour.
a) 15
b) 30
c) 20
d) 25

Its b) 30.

As Marginal product = 50-30=20

Suppose that in 1999 ABC Corp produced 500 million units of a good at an average cost (LAC) of $2 and in 2000 ABC Corp expanded its plant capacity and produced 600 million units at an average cost (LAC) of $1.80. In this range, one can conclude that ABC Corp is experiencing:

a) Economies of Scale
b) Diseconomies of scale
c) Constant returns to scale
d) Diminishing returns

a) Economies of Scale
( As there is reduction in cost)

Joe's Butcher Shop is producing where MR = MC. Joe's Butcher Shop must be

a) earning a zero economic profit
b) incurring a loss.
c) maximizing profits
d) maximizing revenue but not maximizing profits

c) maximizing profits

Marginal cost intersects average variable ...

Solution Summary

Solution discusses the Economies of Scale

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Among the roadside stores of a middle class suburb, there used to be two drugstores, approximately the same size. One was on the side of the main road where traffic was the busiest in the morning; the other was on the opposite side of the road. They were about 50 meters apart. After many years of competing, the two businesses were merged and the shop on the busy-morning side of the road was shut down. Why did the owners of these businesses decide to do this? Could this decision be explained by the concept of economies of scale?'

Among the roadside stores of a middle class suburb, there used to be two drugstores, approximately the same size. One was on the side of the main road where traffic was the busiest in the morning; the other was on the opposite side of the road. They were about 50 meters apart. After many years of competing, the two businesses were merged and the shop on the busy-morning side of the road was shut down. Why did the owners of these businesses decide to do this? Could this decision be explained by the concept of economies of scale?'

(a) A list of reasons (based on micro economic theory) why the owners decided to merge the businesses (or close one and retain the other). The reasons should centre around costs structures such as average, fixed, variable and total costs and other relevant factors

(b) Arguments for and against whether the merge decision could be explained by the concept of economies of scale.

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