Question

Economies of scale:

a. occur when a firm's average total cost decreases as the scale
of its operation increases
b. usually occur when variable costs are very large
c. Both of the above
d. Neither of t

Answer 1

Economies of scale refer to the reduction in average total costs as a firm's scale of production increases. The correct answer is that they occur when average total costs decrease with increased production, not specifically relating to variable costs.

Step-by-step explanation:

Economies of scale occur when a firm's average total cost decreases as the scale of its operation increases. This concept is central to the idea that a larger factory or a business, through increased production, can produce goods at a lower average cost than a smaller one. Economies of scale are a result of factors such as spreading fixed costs over more units of output, bulk buying of materials, and more efficient use of production techniques. However, it's important to note that diseconomies of scale can occur when a firm becomes too large, leading to increased average costs.

In response to the student's question, the correct answer is: a. occur when a firm's average total cost decreases as the scale of its operation increases, because economies of scale are not dependent on the proportion of variable costs but on the overall efficiency gains of increasing production levels.