If a firm builds a larger plant and diseconomies of scale apply,which of the following statements is correct?
A)The economic capacity output of the larger plant has a lower average cost.
B)The economic capacity output of the larger plant has the same average cost.
C)The economic capacity output of the larger plant has higher average cost.
D)The LRAC cost curve will decrease as output increases.

Question

Quizplus · Accepted Answer

If diseconomies of scale apply, as the firm builds a larger plant and increases output, the average cost per unit will increase. This is due to factors like increased bureaucracy, communication issues, and difficulty coordinating larger teams, all of which can create inefficiencies and increased costs. Therefore, the economic capacity output of the larger plant has a higher average cost. Option A is incorrect because the average cost per unit will increase, not decrease. Option B is incorrect because diseconomies of scale mean that the average cost per unit will not stay the same. Option D is incorrect because diseconomies of scale mean that as output increases, the LRAC cost curve will increase as well.

If a Firm Builds a Larger Plant and Diseconomies of Scale