Question

In the long run a company that produces and sells pizzas incurs total costs of $1,050 when output is 90 pizzas and $1,200 when output is 100 pizzas. The pizza company exhibits Group of answer choices economies of scale because average total cost is falling as output rises. diseconomies of scale because average total cost is rising as output rises. diseconomies of scale because total cost is rising as output rises. economies of scale because total cost is rising as output rises.

Answer 1

diseconomies of scale because average total cost is rising as output rises

Step-by-step explanation:

Economies of scale is the fall in average costs due to an increase in output. This occurs since as more units are produced, fixed costs are being spread over a larger number of units, hence the fall in average costs.

For example,

Variable cost per unit = $20

Fixed costs = $20,000

If 1000 units of a product is produced, average cost = [20,000 + (20 x 1000)] / 1000 = $40.

If 2000 units are produced, average cost = [20,000 + (20 x 2000)] / 2000 = $30.

This shows that as output rises, the average cost per unit falls.

However, the average cost curve is always a U shape. This is because after a particular output level, average costs will rise, as in the case provided. This is diseconomies of scale. Diseconomies of scale is a rise in average total costs as output increases. This is caused by certain inefficiencies that can occur in large firms. For example, bureaucracy, decision making takes more time or there are errors in production as communication disruptions occur. Ultimately, average costs will rise.