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7-1 Scale and Scope: Short Answer Questions

The document contains short answer questions and responses about economics concepts. 1) Economies of scale arise from producing more of the same product, lowering average costs. Economies of scope come from producing different products together at lower total cost than separately. 2) The example of different Rangers' T-shirt designs shows scale economies, as average costs decline with higher output of any one design. 3) Nike may expand into sports beverages under its brand to benefit from economies of scope, leveraging its brand reputation at lower cost than building a new brand.

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Shane Jesuitas
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683 views2 pages

7-1 Scale and Scope: Short Answer Questions

The document contains short answer questions and responses about economics concepts. 1) Economies of scale arise from producing more of the same product, lowering average costs. Economies of scope come from producing different products together at lower total cost than separately. 2) The example of different Rangers' T-shirt designs shows scale economies, as average costs decline with higher output of any one design. 3) Nike may expand into sports beverages under its brand to benefit from economies of scope, leveraging its brand reputation at lower cost than building a new brand.

Uploaded by

Shane Jesuitas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Short Answer Questions

7-1 Scale and Scope

What is the difference between economies of scale and economies of scope?

7-1 Scale and Scope

Scale economies arise from producing greater quantities of the same product. Average total costs fall as you
produce more of the same product. Scope economies arise from producing different products together – total
production cost of producing the two goods together is less than the cost of producing them separately.

7-2 Rangers’ T-shirts

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour
(and $18,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of
$8,000). Does this production exhibit scale economies or scope economies?

7-2 Rangers’ T-shirts

Your marginal costs per shirt are MC = $8,000/1,000 = $8. Your total cost for a quantity (Q) is:

TC = $18,000 + 8*Q

and average costs are

AC=$18,000/Q + $8

This equation indicates average costs decline with quantity. Since average costs fall with output, there are scale
economies for any one design.

7-3 Brand Extensions

Suppose Nike’s managers were considering expanding into producing sports beverages.

Why might the company decide to do this under the Nike brand name?

7-3 Brand Extensions

This is an example of economies of scope. It would be less expensive to produce their current products and the
sports beverage under a common brand name as opposed to going to the great expense of building an additional
brand with the same cachet as Nike. (Nike, of course, must be careful not to dilute the power of the brand too
far).

7-4 Average and Marginal Costs

Describe the change in average costs and the relationship between marginal and average costs under the following
three conditions as quantities produced increase:
Average Cost Marginal Cost vs Average Cost
Constant Returns to Scale Rising, Falling, Flat Higher, Lower, Equal
Decreasing Returns to Scale Rising, Falling, Flat Higher, Lower, Equal
Increasing Returns to Scale Rising, Falling, Flat Higher, Lower, Equal
7-4 Average and Marginal Costs

Average Cost Marginal Cost versus Average Cost

Constant returns to scale Rising Falling Flat Higher Lower Equal

Decreasing returns to scale Rising Falling Flat Higher Lower Equal

Increasing returns to scale Rising Falling Flat Higher Lower Equal

7-5 Learning Curves

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase
production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request
for proposal (RFP) on a project for four units, what is your breakeven price? Suppose that if you get the contract,
you estimate that you can win another project for two more units. Now what is your breakeven price for those two
units?

7-5 Learning Curves

Quantity Marginal Total Cost Average


Cost Cost

1 $64 $64 $64

2 $58 $122 $61

3 $52 $174 $58

4 $46 $220 $55

5 $40 $260 $52

6 $34 $294 $49

Based on the table above, the break-even price for 4 units is $55. The extra cost of the fifth and sixth units is only
$74 or $37/unit.

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