Cluster Question Prompt Consider corporations that use advertising firms to develop marketing campaigns. Corporations can choose to cluster around the single advertising firm to take advantage of localization economies. Each corporation buys one campaign per year from the advertising firm. The cost per campaign is decreasing with the number of corporations in the cluster and is equal to $1000/N for each corporation, where N = number of corporations in the cluster. When corporations cluster, labor costs for the corporations increase. The cost of labor = $10N for each corporation. The corporation only has campaign and labor costs and it's total revenue is equal to $800 and is fixed. Use this information to answer the questions below.

Cluster Question Prompt Consider corporations that use advertising firms to develop marketing campaigns. Corporations can choose to cluster around the single advertising firm to take advantage of localization economies. Each corporation buys one campaign per year from the advertising firm. The cost per campaign is decreasing with the number of corporations in the cluster and is equal to $1000/N for each corporation, where N = number of corporations in the cluster. When corporations cluster, labor costs for the corporations increase. The cost of labor = $10N for each corporation. The corporation only has campaign and labor costs and it's total revenue is equal to $800 and is fixed. Use this information to answer the questions below.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter7: Economies Of Scale And Scope

Section: Chapter Questions

Problem 5MC

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Businesses wanted to reduce their cost to the minimum without compromising the product quality and violating laws. The total fixed cost decreases if the output increases. Thus the business is left with the variable cost to manage. Notably, the concept of the economies of scale also works for the government, non-profit organizations and individuals. The entity becomes more efficient as it produces more output and reduces cost as a result. The organization can benefit from the economics of scale, consequently, the consumers enjoy lower prices, and the economy expands to increase more demand. For huge businesses, economies of scale provide a competitive advantage over small enterprises. There are two types of economies of scale. The cost that the management can control is internal, while the cause for the cost to decrease attributed to geographic location, government policies, and industry changes are externals. Typically the internal economy of scale is found in large businesses as a…
Businesses wanted to reduce their cost to the minimum without compromising the product quality and violating laws. The total fixed cost decreases if the output increases. Thus the business is left with the variable cost to manage. Notably, the concept of the economies of scale also works for the government, non-profit organizations and individuals. The entity becomes more efficient as it produces more output and reduces cost as a result. The organization can benefit from the economics of scale, consequently, the consumers enjoy lower prices, and the economy expands to increase more demand. For huge businesses, economies of scale provide a competitive advantage over small enterprises. There are two types of economies of scale. The cost that the management can control is internal, while the cause for the cost to decrease attributed to geographic location, government policies, and industry changes are externals. Typically the internal economy of scale is found in large businesses as a…
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