?

Microeconomics

Free Version

Upgrade subject to access all content

Difficult

Maximizing Profit on One Input: Economies of Scale

MICRO-TBH4JH

Captain Kurt lives in the small village of Weightsville, population 50. He recently inherited the family business, a fishing company, from his father. The business model required only fishermen (or fisherwomen) to produce the final good. No boat was needed to be produce output (Captain is the aforementioned character's first name, not a title).

Captain's father had previously hired 10 people for this fishing company and was profitable. Not only did total revenues exceed total costs, marginal revenues exceeded marginal costs. Upon inheritance, Captain looked a little more closely at the inner workings of the business, and noticed that the company was operating under economies of scale and will not lose economies of scale if he hires more people. When a company is operating under economies of scale, average costs decrease as the company grows and production increases.