A firm scaled down its operation by reducing all inputs by 50% and experienced a more-than-50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.

Question

Quizplus · Accepted Answer

Economies of scale occur when increasing the scale of production leads to a lower long-run average cost. In this scenario, reducing inputs by 50% and experiencing a more-than-50% decrease in output suggests that when the firm was operating at a larger scale, it was producing at a lower average cost. This indicates the presence of economies of scale at the original output level before the reduction.

A Firm Scaled Down Its Operation by Reducing All Inputs