Panel a of Figure 6.8 shows that Intel€™s average cost in a given year falls with the quantity that it produces. In addition, extra production this year lowers the average cost curve next year. For example, in year 1,AC = 50if quantity is 20 andAC = 40if quantity is 60. If Intel produces 20 in year 1 and 40 in year 2, the average cost in year 2 will be 40. However, for every extra 10 units it produces in year 1, itsACfor any given quantity in year 2 falls by 10%.

a. What is the total cost and the average cost over the two years combined if the firm produces 20 in year 1 and 40 in year 2?

b. What is the total cost and average cost over the two years combined if the firm produces 60 in year 1 and 40 in year 2?

c. Over the two years combined, what is the true additional cost of producing 60 instead of 20 in year 1?

Figure 6.8

Transcribed Image Text:

(b) Economies of Scale and Learning by Doing (a) Learning Curve for Intel Central Processing Units $100 80 60 Economies of scale в 40 AC AC2 20 Learning by doing АCЗ 50 100 150 200 92 9з q, Output per period Cumulative production of Pentium CPU, Millions of units Average cost per CPU, $ D Average cost, $