# Module Five Quiz_Grade C.docx - 1 Economies of Scale...

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1. Economies of Scale Consider the following table of long-run total costs for three different firms: Quantit y 1 2 3 4 5 6 7 Firm A 60 70 80 90 100 110 12 0 Firm B 11 24 39 56 75 96 119 Firm C 21 34 49 66 85 106 12 9 Indicate whether each firm experiences economies of scale or diseconomies of scale. ( Note : If a firm experiences economies of scale in one region and diseconomies of scale in another, make sure to select both columns.) 2. Definition of economic costs Jacques lives in Houston and runs a business that sells boats. In an average year, he receives \$704,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of \$404,000; he also pays wages and utility bills totaling \$286,000. He owns his showroom; if he chooses to rent it out, he will receive \$3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Jacques does not operate this boat business, he can work as an accountant, receive an annual salary of \$20,000 with no additional monetary costs, and rent out his showroom at the \$3,000 per year rate. No other costs are incurred in running this boat business. Identify each of Jacques’s costs in the following table as either an implicit cost or an explicit cost of selling boats.
3. Costs in the short run versus in the long run Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. ( Note : Q equals the total quantity of bikes produced by all factories.) Number of Factories Average Total Cost (Dollars per bike) Q = 100 Q = 200 Q = 300 Q = 400 Q = 500 Q = 600 1 360 200 160 240 400 720 2 540 300 160 160 300 540 3 720 400 240 160 200 360 Suppose Ike’s Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is
per bike. Suppose Ike’s Bikes is expecting to produce 600 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using three factories .
In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production. Range Economies of Scale Constant Returns to Scale Diseconomies of Scale Fewer than 300 bikes per month
Range Economies of Scale Constant Returns to Scale Diseconomies of Scale Between 300 and 400 bikes per month More than 400 bikes per month Your cousin Vinnie owns a painting company with fixed costs of \$250 and the following schedule for variable costs: 5. Competition Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for \$30 each. His total cost each day is \$250, of which \$50 is a fixed cost. He mows 5 lawns a day.