When the Defense Department ordered 132 new airplanes, the cost per plane was estimated to be $580 million. A cut in the order to 75 planes increased the per plane cost to $800 million. This change in per unit cost can be explained by
A)a move to minimum efficient scale.
B)the law of diminishing returns.
C)the loss of economies of scale.
D)an increase in total fixed cost.

Question

Quizplus · Accepted Answer

The increase in per unit cost when the order was reduced from 132 to 75 planes is due to the loss of economies of scale. Economies of scale occur when producing more units of a good or service can be done at a lower cost per unit, often because fixed costs are spread over more units. Reducing the order size means fixed costs are spread over fewer units, increasing the cost per plane.

When the Defense Department Ordered 132 New Airplanes, the Cost