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51) What are economies of scale? What are diseconomies of scale?

52) What is the difference between total cost and variable cost in the long run?

53) State the law of diminishing returns. How do diminishing returns differ from diseconomies of scale? Be sure to define diseconomies of scale in your answer.

54) What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?

55) 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?

56) Refer to the Article Summary. Use a graph to illustrate average total cost curves for Aeropostale before and after closing the 30 to 40 stores. Assume that after closing the stores, Aeropostale will be producing at minimum average total cost.

Table 11-9

Fixed Cost

Average Variable Cost

Small plant

$10,000

$2.00

Medium plant

  15,000

  1.30

Large plant

  25,000

  0.50

57) Refer to Table 11-9.  Clock It To Me manufactures clock radios. The table above shows estimates of fixed cost per period and average variable cost for three possible plant sizes.

a.You are employed as the company's cost accountant and have been asked to prepare cost estimates for various output levels for each of the three possible plant sizes. Record your calculations in the table below.

Average Cost of Production

5,000 Clock

Radios

8,000 Clock

Radios

20,000 Clock

Radios

Small plant

Medium plant

Large plant

b.For each of the three output levels, which plant size will generate the lowest average total cost of production?

c.Suppose the firm currently sells 8,000 clock radios per period (using the optimal plant size for this output level). Now, however, it has just secured a long-term contract to supply 20,000 clock radios per period. In the short run, what is the average total cost of producing 20,000 clock radios? Provide a numerical value based on your answer in part a.

d.What happens to average total cost of production in the long run? Provide a numerical value based on your answer in part a.

58) Use a long-run average cost curve graph to illustrate how diseconomies of scale would not make it beneficial for two companies to go through with a merger.

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