In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,400 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 have increased with an increase in output indicates that Firm A is experiencing diseconomies of scale. However, the fact that the average total cost is declining (i.e. $1,200/30 = $40 and $1,400/40 = $35) indicates that the firm is experiencing economies of scale. Therefore, the best choice is D.

In the Long Run Firm a Incurs Total Costs of $1,200