Question

A firm finds that at an output level of 7 units, its total cost is $1834;...

A firm finds that at an output level of 7 units, its total cost is $1834; at 8 units of output, its total cost is $2048.

a. Calculate the value of S (S=AC/MC) for this firm at 8 units of output.

b. Are there economies of scale at 8 units of output? Explain.

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Homework Answers

Answer #1

a)

Total cost at 7 units = 1834$

Total cost at 8 units = 2048

Marginal cost = 2048-1834 = 214$

Average cost of 8 units = 2048/8 = 256$

S = Average cost/ Marginal cost

S= 256/214 = 1.196

2) Average cost at 7 units = 1834/7 = 262$

Average cost at 8 units = 256$

If the average cost is decreasing with increasing in output than economics of sale will be there. Here the average cost is decreasing when the output is increasing from 7units to 8units. So economic of sales is there at 8 units of output.

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