Question

Table 13-16 Listed in the table are the long-run total costs for three different firms. Output Size 1 Unit 2 Units 3 Units 4 Units 5 Units Firm A $100 $110 $120 $130 $140 Firm B $100 $200 $300 $400 $500 Firm C $100 $300 $600 $1,000 $1,500 Refer to Table 13-16. Firm C is experiencing economies of scale. True False

Answer 1

We need to follow the following steps:

1. Make a total cost matrix
2. Make an average cost matrix
3. Plot the average cost on the graph
4. Determine which firm face which type of economies

Cost matrix	Total Cost					Average Cost
↓Firm/Unit→	1.00	2.00	3.00	4.00	5.00	1.00	2.00	3.00	4.00	5.00
A	100.00	110.00	120.00	130.00	140.00	100.00	55.00	40.00	32.50	28.00
B	100.00	200.00	300.00	400.00	500.00	100.00	100.00	100.00	100.00	100.00
C	100.00	300.00	600.00	1000.00	1500.00	100.00	150.00	200.00	250.00	300.00

Average Cost = Total cost / Number of units so for example, if firm A produces 3 units and the total cost is 120 then the average cost is 120/3=40 and so on for all the firms and all the levels of output

Inferences:

1. Average cost of A falls as we produce more units which implies that the firm faces economies of scale
2. Average cost of B stays constant as we produce more units which implies that the firm faces neither economies nor diseconomies of scale
3. Average cost of C rises as we produce more units which implies that the firm faces diseconomies of scale
4. Therefore the statement is FALSE