Author Question: What is the distinction between external and internal economies and diseconomies of scale in an ... (Read 107 times)

futuristic · **on:** Jun 29, 2018

What is the distinction between external and internal economies and diseconomies of scale in an industry?

What will be an ideal response?

Question 2

Toothpicks are sold in a perfectly competitive market. The market price is currently 3 per box of one hundred toothpicks.

At its current level of production, a representative firm in the toothpick industry is producing at a level of output such that long-run average cost is 3.25 per box of one hundred toothpicks. Given this information, is the toothpick industry in equilibrium? Explain.

mjbamaung · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Internal economies and diseconomies of scale are found within firms. External economies and diseconomies of scale occur on an industry-wide basis.

Answer to Question 2

No, the industry is not in equilibrium. In long-run equilibrium, price is equal to short-run marginal cost, short-run average cost, and long-run average cost. Firms in this industry are incurring losses and some will leave the industry. This will increase the price of toothpicks until firms are no longer incurring losses. In the long-run profits are driven to zero.