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CMA Foundation · Fundamentals of Business Economics and Management · Means of Production

A firm doubles its scale of production and finds its long-run average cost per unit rises from Rs 50 to Rs 58 because of coordination problems among its managers. This situation best illustrates:

This illustrates internal diseconomies of scale. The firm's own expansion created managerial coordination problems, pushing long-run average cost up from Rs 50 to Rs 58. Economies of scale or increasing returns would lower average cost instead.

  1. AInternal diseconomies of scaleCorrect
  2. BExternal economies of scale
  3. CIncreasing returns to scale
  4. DLaw of variable proportions in the short run

Explanation

Rising long-run average cost caused by management and coordination difficulties from the firm's own growth is an internal diseconomy of scale. External economies would lower costs, and increasing returns also imply falling average cost. The law of variable proportions concerns varying one input in the short run.

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