Question

If economies of scale are present, what happens to costs?

A. Average costs are constant.
B. Average costs are increasing.
C. Average variable costs are falling but average fixed costs are constant.
D. Average costs are decreasing.

Answer 1

Economies of scale lead to a decrease in average costs as production output increases, and this notion is encapsulated by the long-run average cost curve.

Step-by-step explanation:

If economies of scale are present, it results in a situation where as the level of output increases, the average cost decreases. This concept is associated with the long-run average cost curve, which allows for the variation of all inputs, reflecting a fully flexible adjustment to changes in the scale of an operation. This is in contrast with the short-run average cost curve, where some factors are fixed, leading only variable costs to change. Consequently, in the context of economies of scale, the correct answer to the question is D. Average costs are decreasing.