Suppose that a firm's output increases from 500 to 600 units and its total cost increases from $50,000 to $72,000,and if the price of inputs and technology remain unchanged,calculate the change in average total cost and state whether constant returns to scale,economies of scale or diseconomies of scale exist in this case.
A)Increase of $20 and economies of scale
B)Increase of $20 and diseconomies of scale
C)Increase of $20 and constant returns to scale
D)No change and constant returns to scale

Question

Quizplus · Accepted Answer

Average total cost (ATC) is calculated by dividing total cost by output.
ATC before the increase in output = $50,000/500 = $100
ATC after the increase in output = $72,000/600 = $120

The change in ATC = $120 - $100 = $20, indicating an increase in average total cost.

Since the increase in output led to an increase in average total cost, this implies diseconomies of scale.

Suppose That a Firm's Output Increases from 500 to 600