Which of the following statements is accurate? Select the correct answer below: when the long-run average...

Which of the following statements is accurate?

Select the correct answer below:

when the long-run average cost (LRAC) decreases as output increases, a firm is experiencing diseconomies of scale.

when the long-run average cost (LRAC) increases as output increases, a firm is experiencing diseconomies of scale.

when the long-run average cost (LRAC) increases as output increases, a firm is experiencing economies of scale.

when the long-run average cost (LRAC) decreases as output increases, a firm is experiencing constant returns of scale.

Solutions

Expert Solution

The correct answer is (b) when the long-run average cost (LRAC) increases as output increases, a firm is experiencing diseconomies of scale.

According to definition of Diseconomies of scale, Diseconomies of scale occurs when Increase in output results in increase in long-run average cost (LRAC). Hence option (b) is correct.

According to definition of Economies of scale, Economies of scale occurs when Increase in output results in decrease in long-run average cost (LRAC). Hence option (a) and (c) are incorrect.

When a firm experience constant returns to scale then The total cost function is an upward sloping straight line passing through the origin and is of the form TC = aQ , where TC = total cost and a is some constant.

As LRAC = TC/Q => LRAC = aQ/Q = a => LRAC = a which is constant as output increases.

So, when firm experience constant returns to scale then LRAC is constant as output increases. So, option (d) is also incorrect.

Hence, the correct answer is (b) when the long-run average cost (LRAC) increases as output increases, a firm is experiencing diseconomies of scale.

Rahul Sunny answered 7 months ago

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