1. How does a firm - especially a pharmaceutical company - achieve economies of scale?

As firms get bigger, its fixed costs increase. But the firm is able to spread those fixed costs over larger units of output, reducing its average costs. For a pharmaceutical company, research and development constitute a huge fixed cost; if the firm is able to spread that over more units of output (drugs sold), then its average total cost will fall.

2. Draw a graph of long-run average costs, indicating where economies of scale and diseconomies of scale lie. Based on the increasing number of mergers, where do companies believe they lie on this average total cost curve (if it were their's)??

Economies of scale would occur over the downward sloping portion of the curve; diseconomies of scale over the upward sloping portion. Firms must believe that they are still on the downward sloping portion of the curve for mergers to continue to occur.

3. If economies of scale are good in the long run, and diseconomies of scale are bad, where does a firm want to end up?

Minimum efficient scale. It's that point where there are no more economies of scale, and getting any larger would cause average costs to increase.

Multiple Choice/True False Questions