Question

Diseconomies of scale arise primarily because: group of answer choices

O total cost increases as additional output is produced.
O total output increases at a faster rate than proportionate increases in all resources.
O of the diminishing marginal returns encountered as the firm produces more output.
O of the difficulties involved in managing and coordinating a large-scale producer.

Answer 1

Diseconomies of scale occur due to the complexity in managing a firm as it becomes larger, which leads to inefficiencies and rising average costs with higher levels of output. Therefore correct option is D

Step-by-step explanation:

Diseconomies of scale arise primarily because of the difficulties involved in managing and coordinating a large-scale producer. As firms grow, they may encounter complex management structures, communication barriers, and coordination issues that can lead to inefficiencies. These increasing average costs with higher output levels can result in a situation where the long-run average cost of producing output increases as total output increases. Economic profit, the difference between total revenues and total costs (explicit plus implicit costs), can also be affected by diseconomies of scale.

Economies of scale, on the other hand, occur when the average cost of production decreases as output increases. Unlike diseconomies of scale, as a firm optimizes the use of its factors of production, it is able to spread fixed costs over a larger number of units, hence reducing the average cost per unit. This efficiency usually happens up to a point, after which the complexities of managing the firm lead to increased average costs—this is where diseconomies of scale set in.