2013 Fall – AEC 422 Homework Exercise 1
Due on September 11
Chapter 2 – Horizontal Boundaries, Economies of Scale and Scope
Please submit exercises on a separate sheet. Only type written assignments accepted!
Q1: Economies of scale are usually associated with the spreading of fixed costs, such as
when a manufacturer builds a factory. But the spreading of fixed costs is also important
for economies of scale associated with marketing, R&D, and purchasing. Using an
agribusiness with which you are familiar as an example, discuss how such economies
might exist related to marketing, R&D, or purchasing. Are scale or scope economies
important? If so, what are the major sources?
Q2: What is the difference between economies of scale and learning economies? If an
agribusiness firm in the industry you discuss in Q1 has lower average costs, can you
conclude that it benefits from economies of scale? Do you think there are significant
learning economies in your industry? Discuss the sources and significance.
Q3: I just read a Master’s thesis on determinants of firm growth in the New York food
and beverage industry. Assuming growth (increased gross revenue) is a profitable
strategy for a smaller food processor as they try to duplicate the size of larger rivals, will
the smaller firm/farm necessarily enjoy the same cost position when it reaches the size of
its larger rival? Explain.
Q4: From the past decades, we see WalMart as an enormous store that sells groceries,
household goods, hardware, and other products under one roof. What are the possible
economies of scale that might be enjoyed by WalMart? What are the potential
diseconomies of scale? How does the scale of WalMart and its subsequent cost structure
impact prospective food suppliers? How can Save-A-Lot and Aldi’s, smaller discount
grocery chains, have lower prices than WalMart?