Question

The Big Blue Sky jet company has long-run total costs of $20 million if it produces 5 jets and long-run total costs of $24 million if it produces 6 jets. The Big Blue Sky jet company is experiencing:

A. economies of scale.
B. constant returns to scale.
C. diseconomies of scale.
D. negative profits.

Answer 1

The Big Blue Sky jet company is experiencing diseconomies of scale as its cost per jet increases with the production of additional jets.

Step-by-step explanation:

The Big Blue Sky jet company is experiencing diseconomies of scale if its long-run average cost of producing output increases as total output increases. Given that their long-run total costs rise from $20 million for 5 jets to $24 million for 6 jets, we observe that the cost per jet increases when an additional jet is produced, indicating diseconomies of scale. This could happen if the firm becomes too large and difficult to manage, leading to higher average costs.