Question

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $18,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $11,000).

Note: Assume QQ denotes the quantity produced of a particular design.

Which of the following best represents the average cost function for producing any single design?

A. AC=$18,000Q+$11AC=$18,000Q+$11

B. AC=$18,000+$11QAC=$18,000+$11Q

C. AC=$18,000+$11AC=$18,000+$11

D. AC=$18,000+$11,000AC=$18,000+$11,000

Based on this information, production in any one single design (EXHIBITS OR DOES NOT EXHIBIT) economies of scale.

Answer 1

Note that $18000 is a kind of fixed cost that is needed to be spend in between all 12 designs and is same for all. Per unit cost is $11000. Hence for 12 designs, this fixed cost is $18000 and since Average cost measures per unit cost, the amount of $11000 remains unchanged. The required function is therefore

AC = $18,000 + $11Q. Option B is correct.

As Q increases AC also increases so there are diseconomies of scale. Hence correct choice is DOES NOT EXHIBIT.