Analyzing Cost Structures in Manufacturing

A 2020 study analyzed a natural experiment in Norway where individual income data was made publicly accessible online. The study found that the gap in self-reported life satisfaction between high-income and low-income individuals widened after this policy was implemented. Which of the following best explains this widening gap?

A company is experiencing a decrease in its average cost per unit as it increases production. Match each specific reason for this cost reduction to the underlying economic principle.

A new electric car company invests $2 billion in designing its vehicle and setting up its factory. In its first year, it produces and sells 10,000 cars, with an additional cost of $30,000 per car for materials and labor. In its second year, it produces and sells 100,000 cars, and the additional cost for materials and labor remains $30,000 per car. Despite the per-car material and labor cost staying the same, the company's overall average cost per car decreases significantly. Which statement best analyzes this situation?

A new electric car company invests $2 billion in designing its vehicle and setting up its factory. In its first year, it produces and sells 10,000 cars, with an additional cost of $30,000 per car for materials and labor. In its second year, it produces and sells 100,000 cars, and the additional cost for materials and labor remains $30,000 per car. Despite the per-car material and labor cost staying the same, the company's overall average cost per car decreases significantly. Which statement best analyzes this situation?

Comparing Cost Structures in Different Industries

A small furniture company expands its operations. As it increases its output, its average cost per piece of furniture declines. The company's management identifies three key factors for this cost reduction: 1) The large, upfront cost of its specialized woodworking machinery is now divided across a greater number of units. 2) The company now buys lumber in much larger quantities, receiving a substantial per-unit discount from its supplier. 3) The company has adopted an assembly line method, where each worker specializes in a single task, significantly speeding up the manufacturing time for each item. Which of these factors is a direct result of economies of scale related to the production process itself?

Average Cost in Digital Goods

A software company spends $5 million developing a new project management tool. The cost to deliver the software to each new customer is negligible. In its first year, the company sells 1,000 subscriptions. In its second year, it sells 100,000 subscriptions. Which of the following statements provides the most accurate evaluation of the company's cost structure?

The owner of a new coffee shop observes that their average cost per cup of coffee has been steadily declining as their daily sales volume increases. The owner concludes, 'This is great! The only reason our average cost is falling is because we're now buying coffee beans in bulk and getting a significant discount from our supplier.' Which of the following provides the most accurate evaluation of the owner's conclusion?

Purchasing Power as a Source of Cost Advantage