What do you call a proportionate saving in costs gained by an increased level of
production?
Show answer & explanation
Correct answer: B
Explanation
- The correct answer is option 2 i.e. Economies of scale
- Economies and diseconomies of scale are concerned with behaviour of average cost curve as the plant size is increased. If LRAC (Long Run Average Cost Curve) declines as output increases, then we say that the firm enjoys economies of scale. If, instead, the LRAC increases as output increases, then we have diseconomies of scale.
- In the long run, all inputs are variable, and a firm can have a number of alternative plant sizes and levels of output that it wants. There are no fixed cost functions (total or average) in the long run, since no inputs are fixed. A useful way of looking at the long run is to consider it a planning horizon. The long run cost curve is also called planning curve because it helps the firm in future decision making process.
- The long run average cost curve (LRAC) is derived from short run average cost curves (SRAC).
- The long run average cost function for this firm is defined by the minimum average cost of each level of output.
- Economies of scale explain the down sloping part of the LRAC curve.