written by Daurie Augostine

-- written by Daurie Augostine



Monday, January 3, 2011

Economies of Scale

Suppose L = 1 and K = 2 and the prices of each input are $10 so that TC = $30.  The Q produced is equal to 5 so that AC = TC/Q = $6.  If both inputs double (i.e., L = 2 and K = 4) and Q triples so that Q = 15, will AC rise, fall, or stay the same?  Is this an example of increasing, decreasing, or constant returns to scale?  Is this an example of a short run or long run concept, and why?