Chapter 56, Problem 2CYU

a)

To determine

Whether the firm experiences economies of scale or diseconomies of scale in the case of an interior design firm in which design projects are based on the expertise of the firm’s owner.

Explanation of Solution

In this case, the firm will experience decreasing returns to scale or diseconomies of scale because when the firm takes on more projects, its costs will increase such as the cost of communication and coordination needing the expertise of the firm’s owner.

Economics Concept Introduction

Introduction: When the production becomes efficient for the firm and it gets a cost advantage, then it is a situation of economies of scale. And, when the firm gets a cost disadvantage, then it is a situation of diseconomies of scale.

b)

To determine

Whether the firm experiences economies of scale or diseconomies of scale in the case of a diamond-mining company.

Explanation of Solution

Here, the firm will experience increasing returns to scale or economies of scale because diamond mining needs a large initial set-up cost and with the increase in output, the long-run average total cost will decrease.

Economics Concept Introduction

Introduction: When the production becomes efficient for the firm and it gets a cost advantage, then it is a situation of economies of scale. And, when the firm gets a cost disadvantage, then it is a situation of diseconomies of scale.