A firm will experience increasing returns to scale when the spreading effect is stronger than the...

A firm will experience increasing returns to scale when the spreading effect is stronger than the diminishing returns effect.

True or False

Expert Solution

As output expands there occur two effects namely Spreading effect and Diminishing returns effect. Spreading effect means larger the output greater the quantity of output over which the fixed cost is spread over leading to a lower average total cost and the firm will experience an increasing returns to scale. The other effect is Diminishing return effect which means that the larger the output the greater is the amount of variable input required leading to an increase in variable cost. To avail the increasing returns the Spreading effect must be greater than the Diminishing returns effect.

At the initial stage of production the ATC cure slopes downward where the spreading effect is larger than the diminishing return effect. Again after a point the ATC slopes upward where the diminishing return effect is stronger than the spreading effect since the fixed cost is completely exhausted for a given plant.

Answer: True.

Rahul Sunny answered 2 years ago

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A firm will experience increasing returns to scale when the spreading effect is stronger than the...

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