Problem Set #4

1. The ArtHaus by Antonia continually introduces new pattern of ceramic plates periodically. She can produce a batch of 1,000 potentially useable units per week. However, between the shaping, firing, painting, and glazing, many are discovered to be flawed through the process and must be discarded. However, Antonia can determine where the more common flaws develop and adjust the production process to eliminate these. Her yield rate for the initial batch is usually 60%, but increase by 2% with each additional batch up to 100%. What best describes her cost schedule? How many batches does it take her to reach 10,000 units? 20,000 units?

2. Your firm prints the novelty baseball cards that candy makers include in their bubblegum. Since you regularly sell 100,000 cards per week, you invested in four separate production lines that can each produce 25,000 cards in a standard 40 hour work week. Now a few of the candy makers are signed long term contract that will increase their orders so that you will need to produce 150,000 cards per week. If you can invest in two new production lines at the same cost as your previous four, what does this imply for the shape of your long-run marginal cost curve? What does it imply for changes in your pricing?

3) What impact has the internet had on economies of scale? Provide some current examples. What kinds of firms have had the most trouble adjusting. Provide examples.