Question

Economies of scale Grupo de opciones de respuesta Exist in both the short run and the long run. Explain why average total costs decline as output increases in the long run. Explain why average variable and average total costs decline in the short run. Explain why average total costs increase as output increases in the long run.

Answer 1

Explain why average total costs decline as output increases in the long run.

Step-by-step explanation:

Economies of scale exist when the long run average total cost of producing a good or service decreases as output increases.

E.g. when a company produces 100 units of good X, its average total cost is $10 per unit. But as the output increases to 500 units of good X, the average total cost decreases to $7 per unit. If the output keeps increasing to 5,000 units, the average total cost will be $3. As output increases, the average total cost decreases.