Economies of Scale Analysis at Difofane Limited
Economies of Scale at Difofane Limited
Difofane Limited, a company that produces fighter jets, is facing a decision on whether it exhibits economies or diseconomies of scale in its production process. Economies of scale occur when the long-run total cost decreases as production increases, while diseconomies of scale happen when the long-run total cost increases as production increases.
Analysis of Difofane Limited's Production
Difofane Limited produces 9 fighter jets monthly and its long-run total cost is US$9 million. However, when production increases to 10 fighter jets per month, its long-run total cost rises to US$9.5 million. Now, the critical question is: Does Difofane exhibit economies or diseconomies of scale?
Does Difofane exhibit economies or diseconomies of scale? Final answer: Difofane exhibits diseconomies of scale as the long-run total cost increases when production increases.Explanation
To determine whether Difofane exhibits economies or diseconomies of scale, we need to compare the long-run total cost at different levels of production. In this case, Difofane produces 9 fighter jets per month with a long-run total cost of US$9 million. When production increases to 10 fighter jets per month, the long-run total cost rises to US$9.5 million. Based on this information, we can conclude that Difofane exhibits diseconomies of scale. This is because the long-run total cost increases as production increases, indicating that the cost per unit of production is higher at higher levels of output.