Final answer:
When a company uses longer production runs, the per unit setup cost decreases because setup costs are allocated over more units, a concept inherent to economies of scale.
Step-by-step explanation:
When a company uses longer production runs, the per unit setup cost decreases. This is because the setup costs are spread out over more units, diminishing the setup cost attributed to each individual unit. This concept is part of economies of scale, which refers to the situation where as the quantity of output goes up, the cost per unit goes down.
This is similar to warehouse stores like Costco or Walmart, which can sell products at a lower price due to larger volume sales. Industries can be classified based on their cost behavior in relation to output expansion: constant cost industry, increasing cost industry, and decreasing cost industry. Choosing the optimal scale of production and the least costly production technology is essential for a firm to minimize costs and maximize efficiency.