Question

A firm decides to increase output by opening another plant. In doing so their average total cost changed from $50 with one plant to an average total cost of $40 with two plants. This implies the firm is experiencing:_______

Answer 1

Answer:

Economies of scale

Explanation:

The firm is experiencing economies of scale. Economies of scale result in a decreased average cost of production. Production increases and therefore the fixed cost is distributed more and average fixed cost becomes lesser and lesser as output increases. This leads to a decline in average total cost( As average total cost is the sum of average variable cost and average fixed cost, therefore a decline in average fixed cost leads to a decline in average total cost). This can be seen by an assymptotic average fixed cost for the firm which experiences economies of scale.