Author Question: What are diseconomies of scale and why might they occur? What will be an ideal ... (Read 116 times)

newyorker26 · **on:** Jun 29, 2018

What are diseconomies of scale and why might they occur?

What will be an ideal response?

Question 2

In many large American cities it is common to witness private motorists pulling up to municipal bus stations and allowing perfect strangers to ride into downtown with them in order to take advantage of the high occupancy vehicle lanes that require

two or more drivers. Using the concept of elasticity of demand and total revenue explain why public transit authorities might be concerned with this practice.

AaaA · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Diseconomies of scale mean that as the firm increases all its inputs by the same percentage, its output increases by a smaller percentage. As a result, the firms' long-run average cost rises. Diseconomies of scale can arise from the sheer size of a firm. As a firm grows larger, it becomes increasingly more difficult to manage. Communicating information up and down the management hierarchy as well as communicating between managers and workers on the same level becomes more costly. As a result, the firm experiences diseconomies of scale, that is, its long-run average cost increases as it expands the scale of its operation by producing yet more output.

Answer to Question 2

Public transit authorities may be concerned about this practice because it provides a very good substitute for their services and may make municipal bus service more price elastic and could have a deleterious impact on the revenue generated by the public transit system.