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Evaluating a Firm's Cost Structure
A furniture company produces 1,000 tables per month at an average cost of $150 per table. To meet rising demand, they double their factory size and workforce, now producing 2,000 tables per month. Their new average cost is $170 per table. A consultant concludes that the company is experiencing diseconomies of scale (the opposite of economies of scale). Critically evaluate this conclusion. Is the consultant necessarily correct? Justify your reasoning by providing at least two plausible alternative explanations for the increase in average cost.
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Social Science
Empirical Science
Science
Economy
CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Related
What is the primary benefit of economies of scale?
Which of the following scenarios best illustrates the concept of economies of scale?
How do economies of scale affect the cost structure of a company?
Which of the following is a key characteristic of economies of scale?
Specialization as a Source of Economies of Scale
Input Efficiency as a Source of Economies of Scale
Engineering-Based Economies of Scale
Fixed Costs as a Source of Economies of Scale
Economies of Scale vs. Increasing Returns to Scale
Bargaining Power in Input Purchasing as a Source of Economies of Scale
Network Economies of Scale
Further Reading: The Economist on Economies of Scale and Scope (2008)
A large manufacturing firm is experiencing lower average costs as it increases its production. Match each specific cost-saving advantage the firm observes with the underlying principle that explains it.
A new company that manufactures custom-fit bicycle helmets invested heavily in 3D-printing design software and a major advertising campaign before producing its first helmet. As its sales grew from 100 to 10,000 units, it was able to negotiate bulk discounts on the raw polymer it uses. The company also found that its highly specialized, automated finishing machine, which was previously idle 80% of the time, is now in constant use. Based on this information, which of the following is the LEAST likely source of the company's decreasing per-unit costs?
Strategic Expansion and Cost Advantages
Strategic Expansion and Cost Advantages
Analyzing Cost Reduction at a Growing Company
Evaluating a Firm's Cost Structure