Economies of Scale

Essay

Economies of Scale. Windy Manes, Inc., has just completed a study of weekly production costs during the past year for its compact hand-held hair dryer. By regressing total variable costs on output the firm estimated the following equation.

Here total variable cost (TVC) is expressed in thousands of dollars and Q is in thousands of hand-held hair dryers (units) produced per week. Numbers in parentheses are the standard errors of the coefficients.
A. Estimate total variable cost and average variable cost per week for the coming year at a projected volume of 50,000 units per week.
B. During this period, the company experienced an unexpected interruption in supplier deliveries, and unexpected increases in the cost of labor and materials. If actual average variable costs were $4.30 per unit at an average actual volume of 75,000 units per week, calculate the separate influences on average variable cost of lost economies of scale and the unexpected input cost increases.