Question

Jamal owns a coffee roasting company. He buys raw coffee beans, roasts them, grinds them, and sells them to stores. He recently moved into a larger factory so that he can sell coffee to more stores. How would Jamal know if he is experiencing constant returns to scale from increasing the size of his factory?

Answer 1

Answer:

a. his long run average cost per pound of coffee remains the same

Explanation:

Based on the information provided within the question it can be said that the best way for Jamal to know this would be to check if his long run average cost per pound of coffee remains the same. This is calculated by dividing the total cost by the quantity produced and is a technique that is mainly used to guide the returns to scale which is exactly what Jamal needs in this scenario.

Answer 2

Answer:

A) his long run average cost per pound of coffee remains the same

Explanation:

Usually when a company moves into a larger manufacturing facility, they will seek to achieve economies of scale, but three different scenarios might happen:

1. economies of scale are achieved by lowering the average production cost per unit as the number of units produced increases.
2. diseconomies of scale happen because the production costs per unit may increase due to increasing marginal costs.
3. of the company might achieve constant returns to scale which means that the average production cost per unit remain the same even if the total output of units varies (either increases or decreases).