Question

Part 1

For firms encountering diseconomies of scale, output is, on average:

A) more costly as the firm expands.

B) less costly as the firm expands.

C) increasingly specialized if output falls.

D) constant unless technology advances.

Part 2

If a firm faces economies of scale, as output and capacity expands the firm becomes:

A) less profitable.

B) less efficient

C) more vulnerable to competition.

D) more efficient.

Part 3

If a firm encounters diseconomies of scale, each one percent increase in all resources expands output by:

A) precisely one percent.

B) more than one percent.

C) less than the increase in total costs.

D) less than one percent.

Answer 1

1) option A. This is because when there are diseconomies of scale, long run average total cost rises for every unit of output produced.

2) option D. This is because when there are economies of scale, long run average total cost falls for every unit of output produced. As output rises per unit cost falls and reaches a minimum level so that efficiency is gradually increased

3) option D. Returns to scale measure how much output rises when resources are increased in a given proportion. In decreasing returns to scale (when there are increasing cost or diseconomies of scale) increase in resources by a given percent raises output by a lower relative percent.