Question 6.4

1. A telemarketing firm in which employees make sales calls using computers and telephones

   This firm is likely to experience constant returns to scale. To increase output, the firm must hire more workers, purchase more computers, and pay additional telephone charges. Because these inputs are easily available, their long-run average total cost is unlikely to change as output increases.

2. An interior design firm in which design projects are based on the expertise of the firm’s owner

   This firm is likely to experience decreasing returns to scale. As the firm takes on more projects, the costs of communication and coordination required to implement the expertise of the firm’s owner are likely to increase. As a result, the firm’s long-run average total cost will increase as output increases.

3. A diamond-mining company

   This firm is likely to experience increasing returns to scale. Because diamond mining requires a large initial set-up cost for excavation equipment, long-run average total cost will fall as output increases.