Question

In exhibit 7 of this chapter, the output level where the average total cost is at a minimum is greater than the output level where average variable cost is at a minimum. Why?

Option 1:
Diseconomies of scale
Option 2:
Increasing returns to scale
Option 3:
Constant returns to scale
Option 4:
Economies of scale

Answer 1

The output level where the average total cost is at a minimum is greater than the output level where average variable cost is at a minimum due to economies of scale.

Step-by-step explanation:

Economies of scale refers to a situation where as the level of output increases, the average cost decreases. Constant returns to scale refers to a situation where average cost does not change as output increases. Diseconomies of scale refers to a situation where as output increases, average costs also increase.

In the exhibit mentioned, the output level where the average total cost is at a minimum is greater than the output level where average variable cost is at a minimum. This suggests that the average fixed cost is relatively high at the output level with the minimum average total cost. This aligns with the concept of economies of scale, as higher fixed costs are spread over a larger output, leading to lower average total costs.

Therefore, the correct option is Economies of scale (Option 4).