Question

Consider water pipes. Suppose all water pipes of every size are made from a very strong material of effectively zero thickness (this is to make the math much easier). The output of a water pipe is the number of gallons of water that can flow through it in a month. This is proportional to the area of a cross section. Water pipes are cylinders. The cost of constructing a water pipe is proportional to the amount of material used. Suppose we’re thinking about building a ten-mile-long water pipe from a specific reservoir to a specific town.

a. Are there increasing returns to scale in the construction of this water pipe?

b. Does this process obey the two-thirds rule?

c. What is the mathematical relationship between cost and output?

Answer #1

A) NO,they are not increasing returns to scale in the construction of this water pipe.

b)yes it does follow two third rule.

c) cost output relationship plays an important role in determining the optimum level of production.cost output relationship helps managers in controling profit, decision making ,pricing,

**cost output relationship in short run**

Tc = TFC=TVC

TC+TOTAL COST

TFC= TOTAL FIXED COST

TVC = TOTAL VARIABLE COST

AC =TC/Q

AC=AVERAGE COST

TC = TOTAL COST

Q= QUANTITY

AFC=TFC/Q

TOTAL AVERAGE FIXED COST

TFC=TOTAL FIXED COST

Q = QUANTITY

AVC=TVC/Q

AVC=AVERAGE FIXED COST

TOTAL VARIABLE COST

Q=QUANTITY

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