Reference no: EM131090364
Green Energy, Inc., is a manufacturer of wind turbines. In the annual meeting, the directors are discussing the next year's operation plans. With the country's GDP growing at an impressive pace, overall energy demand is expected to increase by 10 percent annually over the next few years. Wanda Hill, the Director of Sales, claims that the firm is already enjoying economies of scale and so should install new capacity and hire more workers to expand production. However, Edward Sanchez, the Managing Director of the firm, is not in favor of increasing capacity. He is of the opinion that the firm is currently operating at the minimum efficient scale and any further expansion will increase costs.
Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale?
a. The firm caters to just 5 percent of the market demand.
b. Latest data compiled by the Department of Energy reveals that the country's wind energy capacity increased by 5 gigawatt last year when two new wind farms became operational.
c. The firm's average cost of production remained unchanged over the last 100 units.
d. A rival firm experienced an increase in per-unit cost of production this year.
e. The government's expenditure on research and development in the fields of green technology has traditionally been high.
I know what "economies of scale" means, but I have no idea how to answer this question. I guessed "b," but that was wrong. Please explain like I'm five.
The next part of the question:
Which of the following are Wanda and Edward likely to agree with?
a. The per-unit cost of the firm is increasing at the current output level.
b. The marginal cost at the current production level is higher than the average cost.
c. The sale of wind turbines will increase if they can increase supply.
d. The firm currently has excess capacity.
e. Green Energy's profits are expected to fall in the near future.
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