TUTORIAL 9 (WEEK 10)

CLASS ACTIVITIES:

Recap Lecture 9

Tutorial exercises

LEARNING OUTCOMES:

Distinguish between constant, increasing and decreasing returns to scale.

Distinguish between economies (internal and external) and diseconomies of scale.

Demonstrate the least-cost combination of factors to produce a given output.

Demonstrate the maximum output for a given cost of production.

Understand the shape of the long-run average cost curve.

Understand the relationship between short-run and long-run average cost curves and between long-run average and marginal cost curves.

TUTORIAL EXERCISES

Question 1

Explain why long run cost curve are typically U-shaped. Relate your explanation with constant, increasing and decreasing returns to scale concepts.

Question 2

How do diminishing returns differ from diseconomies of scale? How does economies of scale differ from diseconomies of scale?Explain using graphs.

Question 3

Suppose Argyle Sachs has to choose between building a smaller sweater factory and a larger sweater factory. In the following graph, the relationship between costs and output for the smaller factory is represented by the curve ATC1, and the relationship between costs and output for the larger factory is represented by the curve ATC2.

a.If Argyle expects to produce 3,600 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain.

b.If Argyle expects to produce 5,000 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain.

c.If the average cost of producing sweaters is lower in the larger factory when Argyle produces 6,500 sweaters per week, why isn't it also lower when Argyle produces 4,000 sweaters per week?

Question 4

Differentiate between internal and external economies of scale. Provide examples.