Constant Returns to Scale in Kayak Production
What type of scale does the kayak company exhibit?
a. Diseconomies of scale because total cost is rising as output rises.
b. Constant returns to scale because average total cost is constant as output rises.
c. Diseconomies of scale because average total cost is rising as output rises.
d. Economies of scale because average total cost is falling as output rises.
The answer is Constant returns to scale
Explanation: Constant returns to scale is when a firm changes its inputs (labour or capital) and these changes lead to a proportionate increase or decrease in output. For example, when the total cost incurred to produce kayaks was $15,000, output was 30 kayaks. The input to output ratio is 500 ($15,000 ÷ 30).
And when the total cost incurred to produce kayaks was increased to $20,000, output was 40 kayaks. The input to output ratio is still 500 ($20,000 ÷ 40).
Reflecting on the data, it is evident that the kayak company exhibits constant returns to scale in production. This means that as the output increases, the average total cost remains constant. The input to output ratio stays the same, indicating that the company is able to maintain efficiency and productivity as it scales up production.
Constant returns to scale are beneficial for companies as it allows them to grow their output without incurring significant increases in costs. This efficiency in production can lead to higher profits and overall success for the company in the long run.
By understanding the concept of constant returns to scale and applying it to the kayak company's production data, we can see how important it is for businesses to optimize their operations to achieve efficiency and sustainability in the face of growth and expansion.