RC Question 20 Explanation
DISCUSSION: Increasing returns means that the bigger your business gets, the more efficient it is. This creates a natural monopoly – the biggest business is the most profitable.
The pin factory model says that specialization allows increasing returns to scale.
Many of the wrong answers involve an industry getting more efficient, but not bigger.
___________
- The publishing house has gotten smaller. It seems more efficient, but a company has to get bigger to get returns to scale.
- CORRECT. Specialization has allowed the beehive to grow and specialize further, becoming more efficient in the process. This is exactly the pin factory model.
- The school hasn’t gotten bigger – there are no returns to scale here.
- The lobster industry has gotten more efficient, but not bigger.
- Here the colony did not get more efficient as it grew. In fact, it gets less efficient, because two anthills can keep more ants than a single hill. For increasing returns to scale, a single large anthill should have been more effective.
For answer choice E, isn’t the issue the lack of specialization for the individual tasks? The answer choice does state: “These colonies together contain more ants than could have existed in one colony.”
The central feature of increasing returns to scale is that bigger firms and organizations do better. So by splitting, the anthills show there were limits to scale.
E doesn’t say the colonies *don’t* specialize. Certainly it would be a better answer if it said the ants did specialize, but the central flaw of this answer is that it shows the anthills don’t scale.
Note: This is an old comment but I wanted to clarify the point.