Post-Mid Assignment 2

Submitted to: Mrs. Saleha Waheed

Submitted by: Roshaane Gul

Course Title: Intermediate Microeconomics

Major: Economics

Semester: 3

Submission Date: October 21, 2020

Q-1) What is the difference between economies of scale and returns to scale?
(Marks 3)
 Economies of scale measure the relationship between the output and cost. It’s when the firm
doubles its output for less than twice the cost. The economies of scale include increasing return
to scale as a special case, but it is more general because it reflects input proportions that change
as firm changes its level of production.
Return to scale is the rate at which output increases as the input increased proportionately.
There is increasing return of scale when output increases more than double when input doubles.
When input doubles and also output doubles, there is constant return to scale. And when the
output increases less than double when input doubles, then it is called decreasing return to scale.
Return to scale need not be uniform over all the levels of output. For example, at lower levels of
output, firm could have increasing return to scale. But constant and eventually decreasing return
to scale at higher level of output.
The difference is that economies of scale reflect input proportions that change optimally as
output is increased, while returns to scale are based on fixed input proportions (such as two units
of labor for every unit of capital) as output increases.
Q-2) Distinguish between economies of scale and economies of scope. Why can
one be present without the other? (Marks 3)
Economies of scope are present when the joint output of a single firm is greater than the
output that could be achieved by two different firms each producing a single product
(with equivalent production inputs allocated between them
Economies of scale measure the relationship between the output and cost. It’s when the firm
doubles its output for less than twice the cost. The economies of scale include increasing return
to scale as a special case, but it is more general because it reflects input proportions that change
as firm changes its level of production.
Economies of scale refer to the production of one good and occur when total cost increases by a
smaller proportion than output. Economies of scope refer to the production of two or more goods
and occur when joint production is less costly than the sum of the costs of producing each good
separately. There is no direct relationship between economies of scale and economies of scope,
so production can exhibit one without the other. For example, there are economies of scale
producing computers and economies of scale producing carpeting, but if one company produced
both, there would likely be no synergies associated with joint production and hence no
economies of scope.
Q-3) Suppose that labor is the only variable input to the production process. If
the marginal cost of production is diminishing as more units of output are
produced, what can you say about the marginal product of labor?  (Marks 4)
 
The marginal product of labor must be increasing because the cost of an additional unit of output
is approximately wage divided by marginal product of labor. So as marginal cost of production
decreases, marginal product of labor increases.
The marginal cost of production measures the extra cost of producing one more unit of output. If
this cost is diminishing, then it must be taking fewer units of labor to produce the extra unit of
output. If fewer units of labor are required to produce a unit of output, then the marginal product
(extra output produced by an extra unit of labor) must be increasing. Note also, that
MC  w/MPL,
So, if MC is diminishing then MPL must be increasing for any given w.