Question

The typical pattern for a firm to experience

A. diseconomies of scale initially. followed by constant returns to scale until reaching a production level high enough for economies of scale to kick in.
B. economies of scale initially, followed by constant returns to scale until reaching a production level high enough for diseconomies of scale to kick in.
C. constant returns to scale initially, followed by economies of scale until reaching a production level high enough for diseconomies of scale to kick in.
D. economies of scale initially, followed by diseconomies of scale until reaching a production level high enough for constant returns to scale to kick in.

Answer 1

Economies of scale refers to a decrease in average cost as output increases. Diseconomies of scale occur when average costs increase due to difficulties in managing large-scale operations. Constant returns to scale refer to a situation where average costs do not change as output increases.

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.

For example, let's consider a manufacturing firm that produces automobiles. Initially, as the firm increases its production volume and expands its scale of operations, it can benefit from economies of scale. This means that the average cost per automobile decreases due to factors such as better utilization of resources, bulk purchasing discounts, and specialized labor.

However, at a certain point, the firm may reach a size where it becomes difficult to manage operations effectively. The increased complexity and coordination challenges lead to diseconomies of scale. For instance, there might be communication issues between different layers of management, resulting in delays and disruptions in the production process. As a result, the average cost per automobile increases.

Once the firm reaches a certain production level where it can achieve efficient coordination and management, it experiences constant returns to scale. This means that the average cost per automobile remains stable as the firm continues to increase its output.