1. Under which of the following circumstances is a firm experiencing economies of

scale?

A. The firm increases only its labor input, and output decreases.

B. The firm doubles its inputs, and output triples

C. The firm builds a new plant, and the average cost of production increases

D. The firm hires a new plant manager, and profits increase

E. The product price increases, and the firm increases its output

Number of Workers

Total Output

The correct answer is letter B

Economies of scale are those in which the increase in production results in a drop in the average cost of the product.

To increase its production, it is common for the company to also have to increase the productive factors used in the process, such as the number of machines and the number of workers. The economy of scale happens when the cost of this investment grows less than the production resulting from it.

The concept of economies of scale is, therefore, a non-proportional relationship between the average costs of products and the volume of production.

An example of an industry that works with economies of scale is software. In it, the biggest cost is to develop the program. As the cost associated with producing copies of this program is minimal, the increase in production will result in the dilution of the development cost, resulting in a lower average cost per product sold.