Question

In the long run a company that produces and sells candy bars incurs total costs of $1,200 when output is 2,400 candy bars and $1,400 when output is 2,900 candy bars. The candy bar company exhibits
a. diseconomies of scale because total cost is rising as output rises.b. diseconomies of scale because average total cost is rising as output rises.c. economies of scale because total cost is rising as output rises.d. economies of scale because average total cost is falling as output rises.

Answer 1

Answer:

Option (d) is correct.

Explanation:

Economies of scale occurs when the average total cost decreases as the output increases.

Dis-economies of scale occurs when the average total cost increases as the output increases.

In the long-run,

When output is 2,400 candy bars, the total cost is $1,200  

Average total cost = Total cost ÷ Output

                               = $1,200 ÷ 2,400

                               = $0.5

When output is 2,900 candy bars, the total cost is $1,400

Average total cost = Total cost ÷ Output

                               = $1,400 ÷ 2,900

                               = $0.48

In the given case, average total cost is falling as output rises.

So,  the candy bar company exhibits economies of scale because average total cost is falling as output rises.