Answer to Question #121609 in Microeconomics for abrar

Question

Which of the following industries do you think are likely to exhibit large economies of scale? Explain why in each case.
1. Home building
2. Electric power generation
3. Vegetable farming
4. Software development

Answer 1

Economies of scale occur when a firm's average cost decreases with an increase in production.

1. Home building- home building exhibits economies of scale when the home developers build many homes at once. This allows then to get quantity discounts when purchasing the raw materials at large quantities. In addition, the remains of the materials used in one building don't go to waste because they can use it on the next building. All these reduces the average total cost.

2. Electric power generation- electric power generation exhibits the largest economies of scale in that it is almost everyone that consumes electricity and this means that the power generating plant has very low average fixed cost as well as average variable cost.

3. Vegetable farming- vegetable farming shows economies of scale in that the fixed cost of the land reduces as one increases the volume of vegetables planted and the land is reusable, meaning that there is low variable cost.

4. Software development- software developers exhibit economies of scale in that they only need to write the code once, and then upload the same on the internet as a digital copy.