Production and Cost Scenario Analysis
A firm manufactures custom-designed furniture. The production process is highly skilled, and doubling the number of artisans and the amount of wood (all inputs) leads to exactly double the number of finished furniture pieces. However, the firm operates out of a large, expensive workshop with a high monthly rent that does not change with the level of production.
Based on this information, explain whether the firm is experiencing (1) increasing returns to scale and (2) economies of scale as it increases its output. Justify your reasoning for each.
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