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CA Foundation · Business Economics · Theory of Production and Cost

A bakery experiences economies of scale up to 5,000 units of bread per week, after which it faces diseconomies of scale. Currently producing 7,000 units, the bakery's total cost is ₹3,50,000. If it reduces output to 5,000 units, its total cost becomes ₹2,40,000. What can be inferred about the bakery's long-run average cost at 7,000 units compared to 5,000 units?

The long-run average cost at 7,000 units is ₹50 per unit, while at 5,000 units it is ₹48 per unit. This demonstrates that the bakery has entered the diseconomies of scale phase, where increased production leads to higher average costs.

  1. ALRAC at 7,000 units is ₹50 per unit
  2. BLRAC at 7,000 units is ₹48 per unit and LRAC at 5,000 units is ₹48 per unit
  3. CLRAC at 7,000 units is ₹50 per unit while LRAC at 5,000 units is ₹48 per unitCorrect
  4. DLRAC at 5,000 units is higher than at 7,000 units

Explanation

LRAC at 7,000 units = ₹3,50,000 / 7,000 = ₹50 per unit. LRAC at 5,000 units = ₹2,40,000 / 5,000 = ₹48 per unit. The bakery's LRAC is higher at 7,000 units (₹50) than at 5,000 units (₹48), confirming that 7,000 units lies in the diseconomies of scale region. Option 1 is incomplete; option 3 fully captures the comparison showing that diseconomies of scale increase average costs.

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