Economies of scale and diseconomies of scale explain
A) cost behavior in the short run.
B) profit maximization in the long run.
C) the U-shape of the long-run average cost curve.
D) the U-shape of the short-run average total cost curve.
E) the U-shape of the marginal cost curves.

Question

Quizplus · Accepted Answer

Economies of scale refer to the cost advantages that a firm experiences as it increases its level of output, while diseconomies of scale refer to the cost disadvantages that a firm experiences as it further increases its level of output. These two concepts together explain why the long-run average cost curve has a U-shape. Initially, as output increases, a firm is able to take advantage of economies of scale and reduce its average costs, leading to a downward-sloping part of the curve. However, at a certain point, the firm may experience diseconomies of scale, such as inefficiencies in coordination or increased management difficulties, which cause average costs to rise again, leading to the upward-sloping part of the curve. Thus, the U-shape of the long-run average cost curve is explained by economies and diseconomies of scale.

Economies of Scale and Diseconomies of Scale Explain