Question

What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or​ factory?

A. Higher output levels result in lower market prices.
B. Firms have difficulty coordinating production.
C. Fixed costs become too large.
D. Firms exhaust the benefits of specialization.
E. The marginal product of labor begins to decrease according to the law of diminishing returns.

Answer 1

The correct answer is option B.

Step-by-step explanation:

Diseconomies of scale refer to the situation when a firm reaches that stage where increasing output causes the average cost of production to increase instead of decreasing.

This stage comes after the firm has reaped the economies of scale. Diseconomies can arise because of external as well as internal factors.

The main reason behind the diseconomies is that as the firms become increasingly large, it becomes difficult to efficiently coordinate production.

With large scale production, overcrowding of machines and workers create a mismatch and causes the cost to increase. Also with large scale communication between workers and departments become less effective. All these make it difficult to coordinate the production process.