Which of the following illustrates economies of scale , diseconomies of scale , and constant returns to scale ?

A. Liza's average total cost changes from $4.50 to $2.20 when she increases salad production from 7 to 9 an hour.

B. Sam's average total cost changes from $1.30 to $2.80 when he increases smoothie production from 5 to 8 gallons an hour.

C. Tina's average total cost remains at $3 when she increases pizza production from 12 to 13 an hour.

Question

Emiliano Woods

Business

31 July, 01:09

Which of the following illustrates economies of scale , diseconomies of scale , and constant returns to scale ?

A. Liza's average total cost changes from $4.50 to $2.20 when she increases salad production from 7 to 9 an hour.

B. Sam's average total cost changes from $1.30 to $2.80 when he increases smoothie production from 5 to 8 gallons an hour.

C. Tina's average total cost remains at $3 when she increases pizza production from 12 to 13 an hour.

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Answers (1)

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Izabelle · Answer 1

A. Economies of scale

B. Diseconomies of scale

C. Constant returns to scale

Explanation:

Economies of scale are the situation when a firm experiences a decline in the production cost per unit as the output level increases. The average cost of production decreases. It happens because of several reasons such as specialization of labor.

Diseconomies of scale, on the contrary, is the situation where a firm experiences an increase in the production cost per unit or an average cost of production as the output level increases. It happens after the economies of scale.

The constant returns to scale refer to the situation when the average cost of production remains the same even though the input level is increased. The increase in input causes an equal proportional increase in output such that the average cost remains the same.

On the basis of these definitions, we can say that Liza is facing economies of scale as the average cost of production is decreasing when production is increased.

Sam is facing diseconomies of scale as the average cost of production is increasing as the production is increased. Tina is facing constant returns to scale as the average total cost remains the same when the production is increased.