Author Question: Fred's Widget Company has purchased 500,000 in equipment, which can be sold for a salvage value of ... (Read 737 times)

lunatika · **on:** Jul 1, 2018

Fred's Widget Company has purchased 500,000 in equipment, which can be sold for a salvage value of 300,000 at any time. The best interest rate on alternative investments is 5.

What is the cost of using this machinery for one year? How would your answer be different if the machinery had not yet been purchased?

Question 2

If producing more output increases average cost then

A) there are diseconomies of scale.
B) there are economies of scope.
C) there are diseconomies of scope.
D) there are no economies of scale.

ju · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

Short-run cost = 15,000
Cost if the machinery was not purchased = 200,000 + 25,000 = 225,000
Explanation: The short-run cost is just the forgone interest. The short-run depreciation is sunk, and the salvage value doesn't change. The long-run cost (if the machine has not been purchased) is the depreciation cost plus the foregone interest on the whole 500,000.

Answer to Question 2

A