A computer company’s cost function, which relates its average cost of production

Question

A computer company’s cost function, which relates its average cost of production (AC) to its cumulative output in thousands of computers (CQ) and its plant size in terms of thousands of computers produced per year (Q), within the production range of 10,000 to 50,000 computers is given by

AC = 10 – 0.1(CQ) + 0.3(Q)

Is there a learning curve effect? Are there economies or diseconomies of scale? During its existence, the firm has produced a total of 40,000 computers and is producing 10,000 computers this year. Next year it plans to increase its production to 12,000 computers. Will its average cost increase or decrease? Explain.

Explanation / Answer

The learning curve indicates the relationship between the cumulative output and the inputs. Average cost shows the input requirements per unit output. Learning curve effects is there if average cost falls when output is increased. Here, average cost decreases as output increases (cumulative)

Diseconomies of scale exists here. Average cost increases by 0.3 for every unit increase in inputs.

   AC = 10 – 0.1(40) + 0.3(10)

=9

AC = 10 – 0.1(50) + 0.3(12)

=8.6

When cumulative output increases from 40,000 to 50,000, average cost decreases due to learning effect though there is diseconomies of scale.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.