Question

Economies of scale can arise because:

A. there is usually a qualitative change in the type of capital equipment employed as the scale of operation increases.
B. common or shared resources can be employed as the scale of operation increases, up to the minimum efficient scale (MES).
C. The cost of purchasing and installing larger machines is usually proportionately LESS than for smaller machines.
D. both A and C
E. both B and C

Answer 1

Economies of scale occur when the average cost of production decreases as output increases. This can happen due to more efficient use of shared resources and the lower proportional costs of larger capital equipment. The correct answer that includes these reasons is 'E. both B and C'.

Step-by-step explanation:

Economies of scale can arise for several reasons. One reason is that a qualitative change typically occurs in the type of capital equipment used as the scale of operation increases. Another reason is that larger machines often cost proportionately less to purchase and install than smaller ones. However, it is also significant that shared resources can be employed more efficiently as the scale of operation increases, up to the Minimum Efficient Scale (MES).

When considering the reasons for economies of scale, it is essential to recognize that these factors lead to a decrease in the average cost of production as the quantity of output increases. This explains the competitive advantage of larger firms like warehouse stores such as Costco or Walmart, which can operate large-scale operations and reduce costs.

Therefore, regarding the given options, 'E. both B and C' accurately capture the reasons for economies of scale, where shared resources are used more effectively and larger machines are more cost-effective than smaller ones.