Question

Question 37 (1 point) It can be cost-effective to pursue economies of scale only if: a) marginal product is diminishing. b) demand is small. c) demand is large. d) marginal cost is increasing.

Answer 1

37) a) marginal cost is diminishing.

Marginal cost is the cost of producing an additional unit of output.

Economies of scale is a situation in which cost of producing an additional unit of output, that is the marginal cost is decreasing as output rises. Hence, as long as marginal cost is diminishing with output, it is cost effective to pursue economies of scale.

37) a) False

Total cost is the sum of all costs that have to be incurred for production of goods.

Cost per unit of output is the average cost. Hence the statement is false.

38) a) True

Sunk cost, by definition, is the cost that has be incurred in order to carry out business. It is the cost that once spent, cannot be recovered. Sunk cost doesn't effect future decisions of the business. It differs from future cost that businesses face and includes cost on machinery and factory rents, etc.

When Toyota spent $1 billion to develop Prius, it cannot recover that amount and the money spent already doesn't effect future decisions for Toyota. Hence, for Toyota, the $1 billion was a sunk cost.