Question

Which of the following cost functions exhibits economies of scale?

(a) C(q) = q(10 + q2)

(b) C(q) = q3 + 30

(c) C(q) = q2 + 10

(d) None of the above

Answer 1

Option (d).

First, we find Average cost (AC = C(q) / q) for each cost function. A cost function will exhibit economies of scale if AC decreases with increase in q.

(a) C(q) = q x (10 + q²)

AC = C(q) / q = (10 + q²)

As q increases, (10 + q²) increases.

(b) C(q) = q³ + 30

AC = C(q)/q = q² + (30/q)

As q increases, AC first falls but then starts rising, so there is no universal economies of scale.

(c) C(q) = q2 + 10

AC = C(q)/q = q + (10/q)

As q increases, AC first falls but then starts rising, so there is no universal economies of scale.