Question

Based on the information provided in the table below, which of the three firms experiences economies of scale, constant returns to scale, and diseconomies of scale? Calculate the average cost for each firm to justify your answer. ​​​ (15 points)

Output

TC firm 1

TC Firm 2

TC Firm 3

1

$1000

$800

$800

2

$1800

$2000

$1600

3

$2550

$3300

$2400

4

$3300

$5000

$3200

5

$3900

$7500

$4000

6

$4200

$12000

$4800

Answer 1

Output	TC firm 1	TC firm 2	TC firm 3
1	$1,000	$800	$800
2	$1,800	$2,000	$1,600
3	$2,550	$3,300	$2,400
4	$3,300	$5,000	$3,200
5	$3,900	$7,500	$4,000
6	$4,200	$12,000	$4,800

Output	AC firm 1	AC firm 2	AC firm 3
1	$1,000	$800	$800
2	$900	$1,000	$800
3	$850	$1,100	$800
4	$825	$1,250	$800
5	$780	$1,500	$800
6	$700	$2,000	$800

AC = (TC / Output)

• Economics of scale when AC falls as Output increases
• Diseconomies of scale when AC rise as Output increase
• Constant return to scale when AC remanis same as Output increases.

Firm 1 experiences economies of scale.

Firm 2 experiences diseconomies of scale

Firm 3 experiences constant return to scale.