Chapter Thirteen

Chapter 12 - Production and Cost Analysis II

UGI 105 HW9 LR Cost Curves
CHAPTER TWELVE

1. State whether the following firms are experiencing economies of scale or diseconomies of scale.

a. West Company can produce 1,500 units at an average total cost of $2.50 or 1,800 units at an average total cost of $2.25.

b. North Company can produce 500,000 units at a total cost of $240,000 or 600,000 units at a total cost of $275,000.
c. Iams can produce 10,000 bags of dog food at a total cost of $150,000. If they increase their production by 7%, total costs will rise by 3%.

ANS
a. Economies of scale; b. Diseconomies of scale; c. Economies of scale

2. Use the following data to draw a long-run average total cost curve. Label the range of diseconomies of scale, constant returns to scale, and economies of scale.

Quantity	LRATC
5	$11
10	$8
15	$7
20	$6
25	$6
30	$6
35	$7
40	$10
45	$12

1. 
   What is this firm’s minimum efficient level of production?
   

2. 
   What can you conclude about the short run cost of producing 25 units of output?
   

3. 
   If the owner of this firm told you that they were currently producing 15 units of output and that the average cost was $7.50, what can you conclude about the technical efficiency and economic efficiency of this firm?
   

ANS
The completed graph should look like the one below.

1. 
   The firm’s minimum level of efficient production is 20 units.
   
2. 
   The short-run cost of producing 25 units must be at least $6. If the fixed inputs are not fixed at the levels that the firm would choose in the long run for producing 25 units, then the short run costs are likely higher than $6.
   
3. 
   These costs are higher than the long-run costs, so we can conclude that the firm is not being economically efficient (it is not using the least-cost combination of inputs). However, we cannot conclude anything about technical efficiency.
   

3) In order to produce 100 tons of wheat;
Firm A uses 10 labor and 1 hectars of land and
Firm B uses 1 Labor and 100 hectar of land.

1. 
   Which firms’s production is technically efficient?
   

ANS: Both firms are technically efficient since neither uses more of both inputs.

2. 
   Suppose each worker’s wage is $10 and the rent of the land is $1000. Which firm operates economically efficient way?
   

ANS:
TC of production of Firm A: (10L x $10) + (1Land x $1000) = $ 1100

TC of production of Firm B: (1L x $10) + (100Land x $1000) = $100.010
Firm A is more economically efficient.

3. 
   Suppose each worker’s wage is $100 and the rent of land is $40.
   

Which firm operates economically efficient way?

ANS:
TC of production of Firm A: (10L x $100) + (1 Land x $40) = $1040

TC of production of Firm B: (1L x $100) + (100 Land x $40) = $500

Firm B is more economically efficient.

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