Question

a) Increasing returns to scale (also known as economies of scale) occurs when average cost is                            [CHOOSE]                       ["minimized", "steady", "rising", "maximized", "falling"]         .

b) Decreasing returns to scale (diseconomies of scale) occurs when average cost is                            [CHOOSE]                       ["maximized", "minimized", "falling", "steady", "rising"]         .

c) When marginal cost is less than average cost, a firm will experience                            [CHOOSE]                       ["profit maximizing", "decreasing", "increasing", "constant"]         returns to scale.

d) When marginal cost is greater than average cost, a firm will experience                            [CHOOSE]                       ["decreasing", "profit maximizing", "increasing", "constant"]         returns to scale.

Answer 1

Answer

(a)

According to definition of economies of scale, economies of scale occurs when Average cost is falling. Thus, Increasing returns to scale (also known as economies of scale) occurs when average cost is falling.

Hence, the correct answer is (e) falling.

(b)

According to definition of diseconomies of scale, diseconomies of scale occurs when Average cost is rising. Thus, Increasing returns to scale (also known as economies of scale) occurs when average cost is rising.

Hence, the correct answer is (e) rising.

(c)

It is the properties of the cost curves that when Average cost is falling, Average cost is greater than Marginal cost and when Average cost is rising, Average cost is lesser than Marginal cost.

Thus when marginal cost is less than average cost this means that Average cost is falling and hence as discussed above this firm will experience Increasing returns to scale.

Hence the correct answer is (c) increasing returns to scale

(d)

It is the properties of the cost curves that when Average cost is falling, Average cost is greater than Marginal cost and when Average cost is rising, Average cost is lesser than Marginal cost.

Thus when marginal cost is greater than average cost this means that Average cost is rising and hence as discussed above this firm will experience decreasing returns to scale.

Hence the correct answer is (a) decreasing returns to scale