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
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.
The answer to your first question is Firm C. This is because Firm C experiences high, inconsistent increasing costs as production quantity increases, unlike Firm A whose production remains constant at 100 and Firm B whose cost increases consistently by a manageable amount of a 100.
The answer to your second question is D. In the short run, a firm incurs fixed costs whether it produces output or not. This is because fixed costs are defined as expenses that do not change as business activity increases, decrease or produces no output at all. Examples of fixed costs are rent, utility bills and fixed interests on loans.