Question

In the long run a company that produces and sells covers for cell phones incurs total costs of $2,500 when output is 1,250 covers and $4,000 when output is 1,500 covers. For this range of output, the cell phone cover company exhibitsa. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. efficient scale.

Answer 1

Answer: Option(c) is correct.

Step-by-step explanation:

Given that,

(1)Total costs = $2,500 at Output = 1250 covers

(2)Total costs = $4000 at Output = 1500 covers

So,

(1)Average Total Cost =
`(Total\ Cost)/(Quantity)`

=
`(2500)/(1250)` = 2

(2) Average Total Cost =
`(Total\ Cost)/(Quantity)`

=
`(4000)/(1500)` = 2.67

This occurs when average cost increases with increase in the output, if average total cost decreases with an increase in the level of output then the company exhibits economics of scale.

∴ Average total cost increases with increase in the level of output. Hence, company exhibits a diseconomies of scale.