Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm is benefiting from economies of scale.
B
The firm is cutting its fixed costs to zero.
C
The output price is rising, leading to increased revenue.
D
The firm is experiencing higher variable costs without increasing output.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm experiences a decrease in average total cost (ATC) as it increases production, it usually means that the firm is benefiting from economies of scale. This happens because as the firm produces more goods, it can spread its fixed costs, like rent and machinery, over a larger number of products. For example, if a factory pays $1000 in rent, producing 100 items means the rent cost per item is $10, but if it produces 200 items, the cost per item drops to $5. Additionally, the firm might also become more efficient, using resources better and reducing variable costs, which further lowers the ATC. Overall, increasing production allows the firm to lower the cost per unit, making it more competitive in the market.
Detailed Explanation
When a firm produces more, it can spread its costs over more products. Other options are incorrect because Some might think cutting fixed costs to zero helps, but fixed costs are costs that don't change with production; It's easy to think that higher prices mean more money, but that doesn’t lower costs.
Key Concepts
Average Total Cost (ATC)
Economies of Scale
Fixed and Variable Costs
Topic
Calculating Average Total Cost
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.