Question

# 1) The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes...

1) 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
\$8,000). Does this production exhibit scale
economies or scope economies?

2) Suppose you have a production technology that
can be characterized by a learning curve. Every
time you increase production by one unit, your
costs decrease by \$6. The first unit costs you
\$64 to produce. If you receive a request for proposal
(RFP) on a project for four units, what
is your break-even price? Suppose that if you
get the contract, you estimate that you can win
another project for two more units. Now what
is your break-even price for those two units?

1) Ans - Economies of scale

Explanation:

Here total cost = 18000 + (8000/1000)*Q

TC = 18000 + 8Q

ATC = TC/Q = 18000/Q + 8

It means ATc will fall as Q is rising means economies of scale.

Scope economies arise when the firm produce different products together so total production cost of producing the two goods together is less than the cost of producing them separately. But here there is no such case so economies of scale is correct answer.

2)

 Quantity(Units) MC TC AC = TC/Q 1 64 64 64 2 58 122 61 3 52 174 58 4 46 220 55 5 40 260 52 6 34 294 49

Break-even price for four units = 220/4  = \$55

Break-even price for those next two units (i.e., 5th and 6th units) alone = (40 + 34) / 2 = \$37

** we are only allowed to do 1st question, however i answer both the questions. please hit like, if satisfied**

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