In the long run Firm A incurs total costs of $1,050 when output is 30 units and $1,200 when output is 40 units.Firm A exhibits
A) diseconomies of scale because total cost is rising as output rises.
B) diseconomies of scale because average total cost is rising as output rises.
C) economies of scale because total cost is rising as output rises.
D) economies of scale because average total cost is falling as output rises.

Question

Quizplus · Accepted Answer

The fact that total costs increase as output increases suggests that firm A experiences increasing returns to scale up to a certain output level, beyond which it experiences decreasing returns to scale. The evidence of this is that the average total cost decreases from $35 per unit when output is 30 units to $30 per unit when output is 40 units, indicating that the firm is benefiting from economies of scale. Therefore, the correct answer is D, economies of scale because average total cost is falling as output rises.

In the Long Run Firm a Incurs Total Costs of $1,050