Question

Suppose that per-unit costs for Alpha-Zeta Co. are $25 when they are producing 50,000 units. Now suppose that the firm increases production to 50,100 units and total costs are $2,000,000 at that level of production. Question: What is occurring as the firm increases production from 50,000 to 50,100 units?

Answer 1

Answer:

Diseconomies of scale due to the fact that per unit cost increased from $25 to $39.92

Explanation:

Economies is scale is when a larger production is a product leads to reduced cost of production.

For example if production of 1,000 units of a good costs $20 per unit, but production of 1,500 units goes for $17. The cost of production per unit reduces. So there is economies of scale.

In the given scenario production of 5,000 units is at $25 per unit.

While at 5,100 units it is (2,000,000 ÷ 50,100) = $39.92

So this is a diseconomies of scale.