Important Background information:
The most well known kind of technical (internal) economy of scale arises
because the capacity of a small set of technical units frequently rises
in greater proportion than their cost as the set of technical units
becomes larger. This technological relationship is of prime importance
and is known as the six-tenths rule.
The “six-tenths rule” stated mathematically is:
C2 = C1 [Y2/Y1]0.6
Where:
C1 is the total cost of a small set of technical units
C2 is the total cost of a larger set of technical units
Y1 is the capacity of a small set of technical units
Y2 is the capacity of a large set of technical units
In the six-tenths rule a technical unit is the unit cost of say:
A software package
A personal computer
A microprocessor
An oil tanker
An EPOS
Economics Homework Solutions
#3956
Internal economies of scale & six-tenths rule.
Please can you help me understand the following question for exam revision purposes.
Can you include the step by step workings so i can understand how it should be done, as well as the final solution.
Question: The six-tenths rule quantifies the relationship between the relevant costs of a firm's decision to expand and the increased internal economies that result from that expansion.
Given that C1 represents the relevant costs incurred in delivering an installed capacity of Y1 and C2 the new relevant costs incurred in delivering a new installed capacity of Y2, derive a mathematical relationship that relates n, the scaling factor to C1, C2, Y1 and Y2
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