Consider the following statements when answering this question.
I. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale.
II. Diminishing returns determines the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve.
A) I is true, and II is false.
B) I is false, and II is true.
C) Both I and II are true.
D) Both I and II are false.

Question

Quizplus · Accepted Answer

I is true because increasing returns to scale mean that as production increases, the average cost per unit decreases, resulting in economies of scale.
II is also true because in the short run, with a fixed amount of inputs, increasing production leads to diminishing returns, and as a result, the short-run marginal cost curve becomes steeper. In contrast, in the long run, a technology's returns to scale determine the cost associated with producing one more unit.

Consider the Following Statements When Answering This Question