What happens to the difference between ATC and AVC as a firm’s output expands. Explain.
The difference narrows. ATC is the sum of AVC and AFC.. Since AFC declines steadily as output rises, the difference between ATC and AVC must narrow steadily.
How would you distinguish between the short run and the long run?
In the short run there are fixed costs; in the long run there are no fixed costs.
What are economies of scale? Please give an example. What are diseconomies of scale? Please give an example.
As output rises, a firm’s ATC declines. It is producing more and more units using the same overhead, so the cost per unit is declining. For example, if a firm builds an assembly line to turn out stereo speakers, it can lower ATC by increasing output. If the assembly line were run for just 8 hours a day, by adding a second shift, output could be doubled without incurring the expense of building a second assembly line.
Once output rises beyond a certain point, diseconomies of scale begin to set in. For example, as output expands, a firm may be able to get a quantity discount from a supplier. But as the firm buys an increasing percentage of that supplier’s output, not only will the supplier no longer grant the quantity discount, but it may charge a premium for additional output. Why? Because it will have to build new plant and equipment and hire new employees to fulfill the firm’s increasingly large orders.
Your rich uncle died and left you $100,000, which you decided to use for your own Internet business. What business will go into, and what will be your fixed and variable costs? Show how your business can take advantage of economies of scale.
You should go into the type of business with which you some familiarity. I’m, of course, familiar with writing and selling books, so I’d take the $100,000 and sell my books over the Internet. I’d spend $50,000 setting up a data base, establishing links with other websites, and buying lists of potential...
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