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1.Microsoft found that instead of producing a DVD player and a gaming system separate, it is cheaper to incorporate DVD playing capabilities in their new version of the gaming system. Microsoft is taking advantage of

a.Economies of Scale

b.Learning curve

c.Economies of Scope

d.Decreasing marginal costs

2.As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because:

a.total fixed costs are decreasing as more clubs are produced.

b.average variable cost is decreasing as more clubs are produced.

c.there are scale economies.

d.total variable cost is decreasing as more clubs are produced

3.Average costs curves initially fall

a.Due to declined average fixed costs

b.Due to rising average fixed costs

c.Due to declining marginal costs

d.Due to rising marginal costs

4.What might you reasonably expect of an industry in which firms tend to have economies of scale?

a.Exceptional competition among firms

b.A large number of firms

c.Highly diversified firms

d.A small number of firms

5.A security system company's total production costs depend on the number of systems produced according to the following equation: Total Costs = $10,000,000 + $2000*quantity produced.Given these data, which of the following is a false statement?

a.There are economies of scale.

b.There are fixed costs associated with this business.

c.There are diseconomies of scale.

d.A firm that produces a larger output has a cost advantage over a smaller firm.

6.A company faces the following costs at the respective production level in addition to its fixed costs of $50,000:

Q Marginal Cost Sale Price Marginal Return

1 $10,000 $20,000 $10,000

2 $11,000 $20,000 $9,000

3 $12,000 $20,000 $8,000

4 $13,000 $20,000 $7,000

5 $14,000 $20,000 $6,000

How would you describe the returns to scale for this company?

a.Increasing

b.Decreasing

c.Constant

d.Marginal

7. Scale and Scope

What is the difference between economies of scale and economies of scope?

8. Rangers' T-shirts

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $18,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $8,000). Does this production exhibit scale economies or scope economies?

9. Learning Curves

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a project for four units, what is your breakeven price?

Hint: First, complete the following table:

Quantity Marginal Cost Total Cost Average Cost

1 $64 $64 $64

2 $58 $122 $61

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