Final answer:
The notion that firms with less than full capacity require greater new external funds when sales increase is false. Such firms can increase production using their existing resources, deferring the need for significant new external investment unlike firms at full capacity.
Step-by-step explanation:
The statement that firms operating at less than full capacity will require greater new external funds when sales increase compared to a firm operating at 100% of capacity is false. Firms operating below full capacity have available resources and can ramp up production without significant new investment, whereas firms at full capacity must invest in new equipment or facilities to handle additional demand. This is especially evident during economic expansions when business investment is crucial for sustained economic growth. An increase in sales for a firm operating below full capacity presents an opportunity to utilize existing resources more effectively before seeking external funding.
For example, during an economic expansion, firms with excess capacity can increase production to meet higher consumer demand without significant new investment. On the other hand, a firm operating at full capacity would need to invest in new capacity to increase output. This could involve going to the financial market to raise the necessary funds, thereby requiring greater new external funds.
In cases where both firms A and B decide to expand output, the decision could lead to increased competition and potential overcapacity, making it critical for firms to assess their current capacity and market demand before making significant investments. Nevertheless, firms operating below full capacity have more flexibility and potentially lower initial costs for scaling up production when sales increase.