Wednesday, April 22, 2015

Which of the following is an example of a diseconomy of scale? A hotel increasing in size from 100 to 105 rooms and needing to hire more staff to...

Of these options, we can imagine that two of them could potentially be examples of diseconomies of scale.  However, without more information, we cannot be completely sure as to which answer your instructor would like to see. 


Your second and fourth options are clearly not right. If your supplier gives you a discount because you increase the size of your order, that is a classic example of an economy of scale.  You get a better...

Of these options, we can imagine that two of them could potentially be examples of diseconomies of scale.  However, without more information, we cannot be completely sure as to which answer your instructor would like to see. 


Your second and fourth options are clearly not right. If your supplier gives you a discount because you increase the size of your order, that is a classic example of an economy of scale.  You get a better price when you grow large enough to order more things from your supplier. Inflation is not connected to diseconomies of scale.  Firms experience inflation regardless of their size.  Inflation will not necessarily hurt a large firm more than it hurts a small one.   For these reasons, these two options are clearly incorrect.


Either of the other two options could or could not be correct, however, depending on how you think about them.  Advertising during the Super Bowl could be seen as a diseconomy of scale. You could argue that a firm only has to advertise during the Super Bowl if it is a big, important company. Because it has to advertise during the Super Bowl, it has to pay a higher price per minute of advertisement than a small firm that advertises at some other time.  On the other hand, you could say that large firms do not have to advertise during the Super Bowl.  Many large firms do not advertise then.  Some small firms do.  This means that advertising during the Super Bowl is not really a diseconomy of scale.


When the motel has to hire more staff, it might be experiencing a diseconomy of scale.  Higher labor costs are one source of diseconomies of scale.  However, the motel’s actual labor costs per output do not necessarily increase just because they hire more people.  Imagine that the hotel has 50 staff to clean 100 rooms.  They expand to 105 rooms and hire only two more staff. Now they have 52 staff cleaning 105 rooms, which is actually a better staff-to-room ratio than before. So this will only be an example of a diseconomy of scale if they have to hire too many new workers and their average costs go up.


So, none of these is a clear example of a diseconomy of scale. Two of them definitely are not examples, while the other two might or might not be.  You will need to decide how you are going to interpret each option in order to decide which answer is right.

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