Question

For each one, the long-run average cost curve eventually exhibits diseconomies of scale. For which firms would you expect diseconomies of scale to set in at relatively low levels of output? Why?

-A copy shop

-A hardware store

-A dairy

-A newspaper

-An automobile manufacturer

-A vodka manufacterer

-A toy store

-A restaurant

Answer 1

Solution:

Diseconomies of scale mean that with an increase in output marginal costs also increase. This will lead to increase in the average cost. We know that marginal cost is a function of variable cost and not of fixed cost. Also, we know that in the long run all costs are variable cost but in the short run, the cost has two components i.e. fixed cost and variable cost. So firm motives should be to reduce the variable cost in order to reduce the output and hence reduce the loss.

From the given firms, those firms should reduce the output whose average cost is high.

Firm	Average cost
A copy shop	High
A hardware shop	High
A dairy	High
A newspaper	Low
An Automobile Manufacturer	Low
A vodka manufacturer	Low
A toy store	High
A restaurant	High

So firms like vodka manufacturer, automobile manufacturer, Newspaper should reduce their output.