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Chapter 2: Problem 26

As a firm grows larger, (LO7) a) economics of scale set in, then diseconomies of scale b) diseconomies of scale set in, then economies of scale c) economies of scale and diseconomies of scale set in at the same time d) neither economies of scale nor diseconomies of scale set in

Short Answer

Expert verified
Option a) Economics of scale set in, then diseconomies of scale.

Step by step solution

01

Economies of Scale

Economies of scale occur when a firm's long-run average costs decrease as its output increases. This can be the result of various factors, such as specialization, bulk purchasing of inputs, and efficient use of resources.
02

Diseconomies of Scale

Diseconomies of scale occur when a firm's long-run average costs increase as its output increases. This can be the result of factors like increased complexity, bureaucracy, communication problems, and inefficiencies in resource allocation. Now let's take a closer look at each option and discuss its validity:
03

Option a) Economics of scale set in, then diseconomies of scale

This is the most accurate representation of how a firm grows. As a firm expands, it initially experiences economies of scale, which help it achieve lower costs per unit of output. However, after reaching a certain size, the firm may start to face diseconomies of scale, leading to increased costs per unit of output.
04

Option b) Diseconomies of scale set in, then economies of scale

This option is not accurate because, in general, a firm would not experience increasing costs per unit of output first and then decreasing costs per unit of output as the output increases.
05

Option c) Economies of scale and diseconomies of scale set in at the same time

This option is not accurate as economies of scale and diseconomies of scale are opposite concepts. In most cases, a firm experiences one or the other, not both, at the same time. Initially, the firm experiences economies of scale as its size grows, helping it achieve lower costs per unit of output. And only after reaching a certain size, the firm may start experiencing diseconomies of scale, leading to increased costs per unit of output.
06

Option d) Neither economies of scale nor diseconomies of scale set in

This option is not accurate as it is rare for a firm not to experience any changes in long-run average costs as it grows. In most cases, a firm will face either economies of scale or diseconomies of scale or both as its output increases. After evaluating all the options, the correct answer is:
07

Answer

Option a) Economics of scale set in, then diseconomies of scale

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