Question

One In the News article titled "Funeral Giant Moves In on Small Rivals" reports that profit for a Houston-based funeral giant is 31 cents on every dollar versus a profit of 12 cents for the funeral industry in general. Such profits are most likely the result of _________.A. Constant returns to scale. B. Economies of scale. C. Higher minimum average costs. D. A downward shift in the production function.

Answer 1

Answer: B. Economies of Scale.

Explanation:

ECONOMIES OF SCALE is a situation where costs are reduced because production rises. This is usually the case with larger firms because they are able to produce more goods which translates to the fall of their cost per good.

For example, a firm has fixed costs of $3000 regardless of if they produce 10 products or 100. If they produce only 10 then it's $300 per product in cost as opposed to producing 100 which is $30 per product in cost. The problem is that only larger firms could be able to produce above 10 goods.

The Houston based funeral house is considered a GIANT so they are probably benefitting from ECONOMIES OF SCALE.