Given the following information, does this firm has economies of scale or diseconomies of scale. Explain why with reference to the values of ATC.
Small production unit . Large production uni
Q . FC VC Q . FC . VC .
5 50 . 50 50 . 500 . 500
10 . 50 . 70 100 500 . 800
20 . 50 . 200 200 . 500 . 2500
For small production unit:
Q | FC | VC | TC=FC+VC | ATC=TC/Q |
5 | 50 | 50 | 100 | 20 |
10 | 50 | 70 | 120 | 12 |
20 | 50 | 200 | 250 | 12.5 |
For small production unit , the firm experiences economies of scale between Q= 5 units and Q=10 units because ATC is decreasing in this range.
And Firm is experiencing dieconomies of scale between Q=10 units and Q=20 units because ATC is increasing in this range.
For Large production unit:
Q | FC | VC | TC=FC+VC | ATC=TC/Q |
50 | 500 | 500 | 1000 | 20 |
100 | 500 | 800 | 1300 | 13 |
200 | 500 | 2500 | 3000 | 15 |
For large production unit , the firm experiences economies of scale between Q=50 and 100 units because ATC is increasing in this range.
And Firm is experiencing diseconomies of scale between Q=100 and 200 units because ATC is decreasing in this range.
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