1. a) Define economies of scale and diseconomies of scale and show these concepts graphically.
Discuss the difference between long-run and short-run cost curves. b) Discuss at least two
reasons as to why a physician-firm wouldn?t find it cost effective to expand its size indefinitely.
c) Referring to the Gaynor and Gertler (1995) study, explain one way in which a physician-firm
might try to limit diseconomies of scale. According to the study, is this method effective?
Explain.
Solution
Hi,
a) Economies of scale refers to increase in output, or scale of operation which leads to decrease
in cost per unit of output as fixed costs are spread out over more units of output. Diseconomies
of scale are the forces that cause larger firms and governments to produce goods and services at
increased per-unit costs. For example, if in a product required both product X and product Y,
diseconomies of scale might occur if product Y is produced at a slower rate than product X
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b) Physcian firm will not find it cost effective to expand size because:
c) The diseconomies of scale can be improved through Economy of scope is typically linked to
the phenomenon in which unit cost decreases when the number of different outputs increase