Fixing up old houses requires plumbing and carpentry. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber, but is not particularly good at either

Question

He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is $50,000 per year. a. What is Jack's average total cost of fixing up two old houses? b. George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up five houses per year. Each earns a wage of $50,000 per year. If George and Harriet work together and fix up five old houses each year, what is their average cost? c. What does this problem tell you about one of the sources of economies of scale?

Answer 1

a. Jack's total cost for fixing up two houses is his wage, $50,000 . Average cost equals total cost divided by output, and so his average cost is $50,000 / 2 = $25,000 .
b. If George and Harriet work together to fix up five houses their total costs will be will be the sum of their wages, $100,000 . Their average cost will be $100,000 / 5 = $20,000 .
c. George and Harriet have a lower average cost than Jack working alone because of the benefits of specialization. Specialization is an important source of scale economies. In a small firm, workers must be able to do several different jobs. In a large firm, workers can specialize in just one or two jobs. The owner of a one-person firm, for example, would have to be responsible for marketing, finance, and human resource decisions. A larger firm would have specialists to do each of those jobs.