Managerial Economics Ch.7 Econ of Scale and Scope

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jobrous
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142628
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Managerial Economics Ch.7 Econ of Scale and Scope
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2012-03-19 23:28:19
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managerial economics
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test 2
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  1. When a firm first begins to experience diminishing marginal returns...
    • Its marginal costs start rising.
    • (Remember - Marginal costs pull average costs.)
  2. If a firm's average (total) cost is greater than its marginal cost, its average (total) cost is _____ as more output is produced.
    • Decreasing
    • (Remember - if MC > AC, AC increases.
    • If MC < AC, AC decreases.)
  3. If a firm experiences economies of scale (increasing returns to scale), then average cost is _______ as output increases.
    Falling
  4. If a production technology exhibits decreasing returns to scale (diseconomies of scale), if all inputs are increased by 50%, _______-
    • Outputs will increase by less than 50%.
    • (Diseconomies of scale imply that output increases by less than a proportional change in inputs).
  5. If your production technology exhibits constant return to scale, and you increase all inputs by 10%, __________--
    Output increases by exactly 10%.
  6. Economy of scope (def)
    The cost of producing two products together is less than the cost of producing each individually.
  7. Economies of scale (increasing returns to scale) ecist when....
    • 1. Average cost decreases as output increases.
    • 2. Marginal cost is less than average cost.
  8. Economies of scale
    Average cost progressively decreases with increases output.

    Price/output = average cost
  9. Constant return to scale
    Average cost remains the same with increased output.

    Price/output = average cost
  10. Diseconomies of scale
    Average cost progressively increases as output increases.

    Price/output = average cost
  11. If a firm experiences economies of scale in the production of x and y. What can be assumed about economies of scope?
    Nothing - different concepts.

    • Economies of scale refer to cost savings from mass production.
    • Economies of scope refer to (total) cost savings from joint production (or multi-product production).
  12. If a firm is experiencing economies of scale, the firm's _____ is falling as more output is produced.
    • Average cost.
    • (Marginal cost just has to be lower than average cost; it doesn't have to be falling.)
  13. If a firm is experiencing LEARNING CURVES,
    The firm's average cost is falling over time at each and every output level.

    (Entire AC curve is shifting downward)
  14. If a firm is experiencing economies of scope in the joint production of x and y, ______
    The joint production of x and y costs less than when x and y are produced separately.

    • Economies of scope refer to total cost savings from joint production.
    • Economies of scale refer to cost savings from mass production.
    • Economies of scope do not necessarily imply economies of scale nor learning curves.
  15. When a firm's average cost curve is U shaped in the long run, the level of output at which the average cost is at its minimum is called the MOST EFFICIENT SCALE (MES). IF the firm is producing more than its MES:
    • Its average cost is rising as more is produced.
    • Its marginal cost is rising as more is produced.
    • Its total cost is rising as more is produced.
  16. If Ford produces 1 million cars per year, it needs 4 million tires - should it buy them or make them in house?
    • Buy them.
    • Firestone and other tire manufacturers probably produce many more than 4 million tires per year, so they benefit from lower costs from economies of scale (and probably learning curves) - these costs savings can be passed on to auto makers.

    In house tire manufacturing by Ford would probably also incur additional costs, such as monitoring slack efforts, health insurance for additional workers, etc.

    IF the benefits of buying from the market are greater than the costs, buy from the market.
  17. The efficiency of mass production, in general, refers to economies of scale.
    • Economies of scale - average costs decrease as more is produced.
    • Also possibly learning curves - average cost curve shifts downward due to learning how to more efficiently mass produce.

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