Figure

Effect of Transportation Costs on Optimal Plant Size

High transportation costs reduce the MES plant size from Q*A to QB As transportation costs rise relative to production costs, MES plant size will fall.

Effect of Transportation Costs on Optimal Plant Size

High transportation costs reduce the MES plant size from Q*A to QB As transportation costs rise relative to production costs, MES plant size will fall.

Output

rate. Before transportation costs, Q*A represents the MES plant size. Including transportation expenses, the MES plant size falls to Q*B. In general, as transportation costs become increasingly important, MES will fall. When transportation costs are large in relation to production costs—as is the case with milk, bottled soft drinks, gravel, and cement—even small, relatively inefficient production facilities can be profitable when located near important markets. When transportation costs are relatively insignificant—as is the case of aluminum, electronic components, personal computers, and medical instruments—markets are national or international in scope, and economies of scale cause output to be produced at only a few large plants.

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