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In the following example, which firm is experiencing diseconomies of scale?Listed in...

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jgeertz | College Teacher | (Level 1) Associate Educator

Posted October 16, 2011 at 12:24 PM via web

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In the following example, which firm is experiencing diseconomies of scale?

Listed in the table are the long-run total costs for three different firms.

Quantity 1 2 3 4 5

Firm A 100 100 100 100 100

Firm B 100 200 300 400 500

Firm C 100 300 600 1,000 1,500            

Which firm is experiencing diseconomies of scale?

Firm A only     Firm B only     Firm C only     Firm A and Firm B only

 

In the short run, a firm incurs fixed costs...

a. only if it incurs variable costs

b. only if it produces no output

c. only if it produces a positive quantity of output

d. whether it produces output or not

1 Answer | Add Yours

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 16, 2011 at 12:32 PM (Answer #1)

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The answer to this is that only Firm C is experiencing diseconomies of scale.

A diseconomy of scale occurs when a firm's per unit costs increase as the firm produces more and more of a given good or service.  Only Firm C fits this description.  Firm A has the same total costs for all levels of production.  Firm B's total costs are going up, but its per unit costs are not going up since it incurs a cost of $100 per unit at each level of output.  By contrast, Firm C's per unit costs do go up.  They go from $100/unit at one unit to $150/unit at two units and eventually as high as $300/unit at five units produced.

 

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