Microeconomics, Module 6, “The Behavior of Firms”

Homework Assignment

(The attached PDF file has better formatting.)

Some of the largest auto insurance companies are low cost companies. Jacob and Rachel disagree about the implications.

Jacob: This phenomenon is evidence that auto insurance has economies of scale, so the larger firms have lower costs.

Rachel: This phenomenon is evidence that the insurance market is competitive, so lower cost firms succeed and grow to be the larger firms.

Based on the readings in Module 6, explain the reasoning of Jacob and Rachel, and relate their views to whether insurance is a constant cost industry or a decreasing cost industry. (One paragraph is sufficient for this homework assignment.)

How does this homework assignment apply to chapter 6 in the textbook, since it talks about constant-cost and decreasing costs, topics discussed in Chapter 7?

[NEAS: Yes, do this homework assignment after reading Chapter 7 of the textbook.]

I have version 7 and you must of done the homework incorrectly if you used chapter 6 to answer the question for module 6. 

Chapter 6 discusses returns to scale on page 156.  It relates increasing, constant, and decreasing returns to scale when applied to the long run of cost curves.

The homework question specifically requests us to relate constant cost and decreasing cost industry.  This relates to economies of scale not to the returns of scale. 

The main difference is that returns to scale relate to increasing "all" of the inputs which can effect the output of increasing, constant, or decreasing given one individual company. 

Whereas, constant-cost and decreasing-cost industry relate to a whole industry and how their cost's are distributed. 

These are very, very different subjects.  I suggest you revisit the homework once you have read Chapter 7. 

Sorry but I would rather have you mad at me but still get the homework correct and the opposite! 

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