Explain the difference between increasing marginal returns and ...

[ap345]

Explain the difference between increasing marginal returns and economies of scale.
 
  What will be an ideal response?

Question 2

The figure above provides information about Light-U-Up Utilities, which is a natural monopoly that provides electricity. If Light-U-Up is regulated, what is its economic profit if it must follow an average cost pricing rule?
 
  A) -60
  B) -20
  C) 0
  D) 30

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Answer to Question 1

Increasing marginal returns apply to the case where a firm has increased only the amount of labor it uses while keeping capital fixed. If increasing marginal returns occur, an additional worker is more productive than the previous worker hired. In this case, the marginal product of the new worker exceeds the marginal product of the previous worker. Economies of scale apply when a firm increases both the amount of labor it uses and the amount of capital it uses. If there are economies of scale, when a firm increases labor and capital by the same percentage, its output increases by a larger percentage.

Answer to Question 2

C

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