Question

Chloe’s Café sells gourmet cinnamon rolls. In the long run, the café incurs a total cost of $500 to produce 1,000 cinnamon rolls. If Chloe’s Café exhibits economies of scale between 1,000 and 2,000 cinnamon rolls, the long-run average total cost for 1,500 cinnamon rolls isa. lower than $0.50.b. ​higher than 500.c. ​higher than $0.50.d. ​equal to $0.50.

Answer 1

Answer:

a. lower than $0.50

Explanation:

As more and more units of output are produced, labor efficiency increases, machine capacity is better utilized, raw materials can be purchased in bulk which reduce the total cost of production.

The above factors give rise to the concept of Economies of scale which leads to a decrease in cost of production as a result of which the average total cost reduces.

Economies of scale refers to savings in cost in the long run owing to efficient use of resources.

Average cost is defined as total cost incurred per unit of output produced.  Current average cost = $500/1000 = $0.5. In case of economies of scale, the long run average cost would be lower than $0.5.