Which of the following best illustrates the cost curves of a firm that is experiencing economies of scale?
A) The short-run marginal cost is falling as output expands.
B) The long-run marginal cost is falling as output expands.
C) The long-run average total cost is falling as output expands.
D) The short-run average total cost is falling as output expands.

Question

Quizplus · Accepted Answer

Economies of scale typically occur in the long run, when a firm can adjust all of its inputs. As output expands and the firm experiences economies of scale, the long-run average total cost (LRATC) will fall. This is because the firm is able to spread its fixed costs over more units of output and take advantage of efficiencies in production, such as specialization among workers and bulk discounts on inputs. The other choices are not necessarily indicative of economies of scale. Short-run marginal cost may fall initially as output expands but may eventually increase due to diminishing marginal returns. Long-run marginal cost may actually rise initially as the firm incurs additional costs to expand its capacity. Short-run average total cost may remain constant or even increase as output expands, depending on the shape of the firm's short-run cost curves.

Which of the Following Best Illustrates the Cost Curves of a Firm