Question

In the long run a company that produces and sells pizzas incurs total costs of $1,050 when output is 90 pizzas and $1,200 when output is 100 pizzas. The pizza company exhibits

	a.	diseconomies of scale because average total cost is rising as output rises.
	b.	diseconomies of scale because total cost is rising as output rises.
	c.	economies of scale because average total cost is falling as output rises.
	d.	economies of scale because total cost is rising as output rises.

Answer 1

A company exhibits economies of scale when average total cost falls as output rises.

A company exhibit dis economies of scale when average total cost rises as output rises.

In the long-run,

When output is 90 pizzas, the total cost is $1,050

So,

Average total cost = Total cost/Output = $1,050/90 = $11.67

When output is 90 pizzas, average total cost is $11.67

When output is 100 pizzas, the total cost is $1,200

So,

Average total cost = Total cost/Output = $1,200/100 = $12

When output is 100 pizzas, average total cost is $12

In the given case, average total cost is rising as output rises.

So,

The pizza company exhibits dis economies of scale because average total cost is rising as output rises.

Hence, the correct answer is the option (a).