Final answer:
This question pertains to the analysis of operating costs under different economic conditions and understanding the concept of economies of scale in production. It involves assessing the potential risks and benefits of expanding a factory and considering the costs associated with economic uncertainty.
Step-by-step explanation:
The question involves calculating the potential costs of operating a factory under different economic circumstances, as well as understanding the concept of economies of scale.
Assuming a 40% chance of a good economy and a 60% chance of a bad economy, with operating costs of $0.5 million and $0.3 million depending on whether the factory is expanded, one would need to evaluate the expected costs and benefits of expansion under uncertainty. This kind of analysis typically involves calculating expected values and making decisions based on them.
Additionally, it's important to understand the concept of economies of scale. As production volume increases, the average cost per unit tends to decrease. This is demonstrated in Figure 7.9, which shows factories with different production quantities and associated costs per clock. A small factory like S produces 1,000 alarm clocks at an average cost of $12 per clock, while a medium factory like M produces 2,000 clocks at $8 each, and a large factory like L produces 5,000 clocks at $4 each, illustrating economies of scale in action.
The decision to invest in lobbying against a tax that could lead to a significant loss - potentially up to $1 million - also reflects a real-world application of economic reasoning and risk assessment.