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Chapter 7: Q38 (page 185)

Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?

Short Answer

Expert verified

No, I don't think taxi cab industries would be subject to significant economies of scale.

Step by step solution

01

Economies of Scale Concept 

It refers to cost advantage (reduction) due to increased level (quantity) of production & resultant efficiency. Average costs fall due to optimisation of assets & total cost spread over a large number of units.

02

Industry Explanation 

This industry service of 'cab' is given on individual personal basis rather than in group or bulk.

Vehicle, fuel, driver all have to be allocated separately to individual customers. And their costs are much standardised or uniform.

So, expanding service doesn't lead to cost reduction in this industry due to above reasons.

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Most popular questions from this chapter

Average cost curves (except for average fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape?

What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?

A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method choices are:

Method 1: 50 units of labor, 10 units of capital ; Method 2: 20 units of labor, 40 units of capital ; Method 3: 10 units of labor, 70 units of capital

If hiring labor for the winter costs \(100/unit and a unit of capital costs \)400, what is the best production method? What method should the company use if the cost of labor rises to $200/unit?

A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work.

Continuing from Exercise 7.1, the firm’s factory sits on land owned by the firm that it could rent for$30,000per year. What was the firm’s economic profit last year?
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