Question

At one time, sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, which are predators of sea lions. The cost of making the first whale is $16,000 ($5,000 for materials and $11,000 for the mold). The mold can be reused to make additional whales, and so additional whales cost $5,000 each. Based on these numbers, the production of fake killer whales exhibits:

A. Does production of fake whales exhibit diseconomies of scale, economies of scale, or constant returns to scale?
B. What is the fixed cost of producing fake whales?
C. What is the variable cost of producing fake whales?

Answer 1

A. Does production of fake whales exhibit diseconomies of scale, economies of scale, or constant returns to scale?

the production of fake whales exhibit economies of scale

• the total cost per unit for producing 1 whale = $16,000
• the total cost per unit for producing 2 whale = $10,500
• the total cost per unit for producing 3 whale = $8,667
• the total cost per unit for producing 4 whale = $7,750
• the total cost per unit for producing 5 whale = $7,200
• the cost per unit keeps decreasing as total output increases

B. What is the fixed cost of producing fake whales?

$11,000, the cost of the mold

C. What is the variable cost of producing fake whales?

$5,000 per whale