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Homework answers / question archive / Green Energy, Inc
Green Energy, Inc., is a manufacturer of wind turbines. In the annual meeting, the directors are discussing the next year's operation plans.
With the country's GDP growing at an impressive pace, overall energy demand is expected to increase by 10 percent annually over the next few years.
1. Wanda Hill, the Director of Sales, claims that the firm is already enjoying economies of scale and so should install new capacity and hire more workers to expand production.
However, Edward Sanchez, the Managing Director of the firm, is not in favor of increasing capacity. He is of the opinion that the firm is currently operating at the minimum efficient scale and any further expansion will increase costs.
Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale?
a. The firm caters to just 5 percent of the market demand.
b. Latest data compiled by the Department of Energy reveals that the country's wind energy capacity increased by 5 gigawatt last year when two new wind farms became operational.
c. The firm's average cost of production remained unchanged over the last 100 units.
d. A rival firm experienced an increase in per-unit cost of production this year.
e. The government's expenditure on research and development in the fields of green technology has traditionally been high.
2. Which of the following are Wanda and Edward likely to agree with?
a. The per-unit cost of the firm is increasing at the current output level.
b. The marginal cost at the current production level is higher than the average cost.
c. The sale of wind turbines will increase if they can increase supply.
d. The firm currently has excess capacity.
e. Green Energy's profits are expected to fall in the near future.
1. Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale c. The firm's average cost of production remained unchanged over the last 100 units .
It is because the director also said that the firm undergoes the economy of scale which consists the firm is producing the output at the lowest possible cost whereas, in the long run, the firm works at the lowest and consistent possible cost over some quantities of product that is, the average cost remained unchanged over some units of production. Hence, increasing the production of output beyond this quantity, the firm would incur the span of rising costs associated with it.
2. 2. Which of the following are Wanda and Edward likely to agree with b. The marginal cost at the current production level is higher than the average cost .
It is because the average cost is dependent on the fixed cost and variable cost, whereas the marginal cost typically depends on the variable costs. Therefore, the marginal cost runs at a faster rate than the average cost. Hence, the increasing extent of average cost requires the rising extent of marginal cost, so both Wanda and Edward likely to agree with this statement.
