Chapter 10R, Problem 24MCQ

To determine

The correct option for given situation where reason for diseconomies of scale is required.

Answer to Problem 24MCQ

Option b and option d both are correct.

Explanation of Solution

Explanation for correct option:

b.

There are various factors that may diseconomies of scale such as overcrowding of fixed factor of production, lack of management, lower utilization of capacity, etc. If overcrowding of fixed factor of production prevails then also the cost per unit will be higher until certain level of production is achieved or full capacity utilization is done. Therefore, option b is correct.

c.

If there are diseconomies of scale then it means that per unit cost of the product increases if the production of additional unit is increased. Increase in average fixed cost can be one of the reasons for causing diseconomies of scale. Therefore, option c is correct.

Explanation for incorrect options:

a.

If increase in returns to scale occurs, then the output level increases in higher percentage than the level of input used for production. Whereas in diseconomies of scale, the output level decreases as compared to th input level. Therefore, option a is incorrect.

d.

Decrease in average fixed cost may occur due to proper utilization of capacity. Decrease in average fixed cost also occurs when economies of scale is achieved. Therefore, option d is incorrect.

e.

Communication problem is not a direct cause of diseconomies of scale instead it can be controlled by the top level managers once detected. Therefore, option e is incorrect.

Economics Concept Introduction

Economies of scale: Economies of scale refers to the level of production where the cost per unit decreases as the production of additional units decreases. This happens due to the spreading of fixed cost over the additional units produced without adding any other fixed assets or fixed cost of production.