Final answer:
Economies of scale refer to the cost advantages that a firm enjoys as it expands its level of production. In terms of a cost function, economies of scale occur when the average cost of production decreases as output increases. To calculate economies of scale from a cost function, you need to analyze the relationship between the level of output and the corresponding average cost of production.
Step-by-step explanation:
Economies of Scale and Cost Function
Economies of scale refer to the cost advantages that a firm enjoys as it expands its level of production. In terms of a cost function, economies of scale occur when the average cost of production decreases as output increases.
To calculate economies of scale from a cost function, you need to analyze the relationship between the level of output and the corresponding average cost of production. If the average cost decreases as output increases, then there are economies of scale present.
For example, let's say a company produces 100 units of a product and incurs a total cost of $10,000. The average cost of production would be $100 ($10,000/100 units). If the company increases its production to 200 units and the total cost is $15,000, the average cost would be $75 ($15,000/200 units). In this scenario, the average cost is decreasing as output increases, indicating economies of scale.