Question

The following quotation appeared in a Wall Street Journal article on the battle for market share in the automobile industry in 2000: “The huge fixed costs involved in developing new vehicles and running big auto factories means auto makers feel compelled to maintain-or expand-market share. Losing share long term could mean shutting down factories, or running factories at unprofitable rates.” Do these statements support economic theory and show that economies of scale do not benefit a firm if the output level is small? Explain.

no less than 250 words in length, make at least one reference to your text or other course materials and provide in-text citations. As you reference information from a source, be sure to provide APA citations in text and at the end of your post.

Answer 1

Yes. If the output level is small and the firm fails to achieve economies of scale, first it will not cover the variable cost and this situation can sustain for few months like paying salary, raw material cost etc but even if fixed cost are covered like rent, interest etc it will lead to close down the firm. So in order to remain in the business it needs to achieve economies of scale and produce output which can meet average total cost then the firm would run in profits