Question

A profit-maximizing firm facing economies of scale that is subject to average cost pricing regulation will produce ______________ from the standpoint of economic efficiency and ______________ economic profits.

Answer 1

A profit-maximizing firm facing the economies of scale that is subject to average cost pricing regulation will produce goods from the standpoint of economic efficiency and normal economic profits.

Step-by-step explanation:

Economies of Scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost. It is also applicable to huge trading companies that purchase larger quantities of goods. The economies of scale are enjoyed because larger purchases attract huge discounts. Therefore, some of these big stores can afford to lower their prices to increase sales, turnover and maximize profits.

Answer 2

A profit-maximizing firm facing economies of scale that is subject to average cost pricing regulation will produce _too little_ from the standpoint of economic efficiency and _not earn_ economic profits.

Step-by-step explanation:

Economies of Scale is the cost advantage that a firm experienced when it increases the level of production output, thereby lowering the cost per unit output. The effect of this is to reduce the average costs of production. This advantage occur due to inverse relationship between per-unit fixed cost and the quantity produced. Firms exploit this advantage to expand their scale of production.

Therefore a profit maximizing firm that is face with economies of scale and subject to average cost pricing regulation will tend to produce less when the cost of production is greater than the revenue, by so doing they earn no economy profit.