Question

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $15,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $5,000).
Does this production exhibit scale economies or scope economies?

Answer 1

Answer: Scale Economies

Explanation:

Scale Economies or Economies of scale refers to a situation whereby a company stands to save more on costs if it produces more goods and services. The more they produce, the more they save.

Riverside Ranger logo T-shirts take $15,000 to set up and that is a set cost.

After that, it will cost $5,000 to make every 1,000 units per design.

The Marginal cost = 5,000/1,000 = $5

Total Cost is the initial cost + the marginal cost per unit.

Total Cost = $15,000 + 5Q

Average Cost = $\frac{15,000}{Q} + 5$

Therefore as Quantity increases, Average cost will decrease showing Scale Economies.