Economies of scale exist when
A) constant returns to scale are present.
B) input prices are falling.
C) average cost falls as the scale of production grows.
D) a 10% increase in all inputs causes a 9% increase in output.
E) firms become extremely large.

Question

Quizplus · Accepted Answer

Economies of scale occur when the average cost per unit of output decreases as the scale of production increases. This can happen due to various reasons, such as a better utilization of resources, more efficient production processes, and increased bargaining power with suppliers. Option A talks about constant returns to scale, which means that the average cost per unit remains constant regardless of the scale of production. Option B talks about falling input prices, which may or may not lead to economies of scale depending on the magnitude of the price decrease and how it affects the average cost. Option D talks about decreasing returns to scale, which implies that a 10% increase in inputs causes less than a 10% increase in output, leading to higher average cost per unit. Option E talks about firm size but does not provide any information about how it affects the average cost per unit.

Economies of Scale Exist When