Question

If Boeing produces 9 jets per month, its long-run total cost is $9.0 million per month. If it produces 10 jets per month, its long-run total cost is $9.5 million per month. Does Boeing exhibit economies or diseconomies of scale?

Answer 1

With 9 jets, The average total cost , $ATC$ = $\frac{\$9.0 million}{9}=\$1.0 million$ and

with 10 jets, $ATC=\frac{\$0.95 million}{10}=\$0.95 million$

Therefore Boeing exhibits economies of scale (increasing returns to scale). Long run average total costs decreases with increase in output.