If a firm has a long- run average cost of $2 when it produces 4,000 units of an input and has a long- run average cost of $1 when it produces $10,000 units and the firm needs 10,000 units of the input, the firm_______ experience economies of scale, which makes the firm ________ likely to make the input rather than buy it.
A)does; less
B)does not; less
C)does; more
D)does not; more

Question

Quizplus · Accepted Answer

Economies of scale occur when increasing production leads to a lower average cost per unit. Since the firm's average cost decreases from $2 to $1 as production increases from 4,000 to 10,000 units, it does experience economies of scale. This makes the firm more likely to produce the input in-house rather than buying it, as producing more lowers the cost per unit.

If a Firm Has a Long- Run Average Cost of $2