A firm decreases its scale of operation and discovers that its long-run average costs decrease. Which of the following does this indicate?
A) The firm's scale initially was too small to experience economies of scale.
B) Its long-run marginal cost was smaller with the larger plant than with the smaller plant.
C) Labour's marginal product has increased.
D) The firm's scale initially was so large that it experienced diseconomies of scale.
E) Diseconomies of scale were absent in the larger plant.

Question

Quizplus · Accepted Answer

If a firm experiences a decrease in long-run average costs when decreasing its scale of operation, it suggests that the firm initially operated at a scale that was too large, resulting in diseconomies of scale. Therefore, choice D is the best answer. Choices A, B, C, and E are incorrect because they do not explain why a decrease in scale would result in a decrease in long-run average costs.

A Firm Decreases Its Scale of Operation and Discovers That