Now let us think about economies of scale as well as the difference between the

Question

Now let us think about economies of scale as well as the difference between the short-run and long-run by considering the table below which gives the costs of producing different quantities of Flip-Flops:

Answer whether each of the following are True/False and clearly explain your conclusion.

A.This firm exhibits constant returns to scale.

B.If this firm uses 2 machines to produce 20 Flip-Flops the total cost is $700.

C. If this firm is using 2 machines to produce 10 Flip-Flops then the firm is in the Short-Run.

Total Variable cost Fixed Cost 10 Flip-Flops 30 Flip-Flops 20 Flip-Flops Number of Machines $400 $300 $100 $1200 $700 $400 $1700 $1300 $1000 2 $500 3 $900

Explanation / Answer

A. False.

Constant returns to scale would mean that the output of the process increases or decreases simultaneously and in step with increase or decrease in the inputs. A plant with a constant returns to scale is equally efficient in producing small batches as it is in producing large batches. However, in the above table it can be seen that with increasing input cost is not decreasing or increasing simultaneously.

B. False.

The total cost is fixed cost plus variable cost. Thus, using 2 machine if the firm produces 20 flip flops, the total cost would be $500 + $700, which equals $1200.

C. True.

Short run is that period of time over which at least one input is held fixed. In the short run, the firm cannot change its fixed input to expand output. Only by varying variable inputs can a firm change its volume of output. Thus, in the above table, the fixed cost remains unchanged and it the variable cost or inputs that can be changed.

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