Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Average cost decreases as production increases due to economies of scale
B
Average cost remains constant regardless of production levels
C
Average cost increases as production increases due to economies of scale
D
Average cost decreases only up to a certain production level and then increases
Understanding the Answer
Let's break down why this is correct
Answer
Economies of scale refer to the cost advantages that firms experience as they increase their production. When a company produces more goods, the average cost of each item usually decreases because fixed costs, like rent and salaries, are spread over a larger number of products. For example, if a factory pays $1,000 in rent and makes 100 toys, the cost per toy is $10. However, if the factory produces 200 toys, the rent cost per toy drops to $5, reducing the average cost. This reduction in average cost allows firms to lower prices or increase profits, making them more competitive in the market.
Detailed Explanation
When a company makes more products, it can spread its costs over many items. Other options are incorrect because Some might think costs stay the same no matter how much is made; It's a common mistake to think costs go up with more production.
Key Concepts
average cost
economies of scale
Topic
Cost Minimization in Firms
Difficulty
medium level question
Cognitive Level
understand
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