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CMA Final · Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis

A firm's cost function shows that doubling all inputs raises output by only 60%. This situation indicates:

Output rising by only 60 percent when all inputs double is a less than proportionate response, which is decreasing returns to scale. This indicates diseconomies of scale, with long-run average cost rising as the firm expands.

  1. AIncreasing returns to scale and economies of scale
  2. BConstant returns to scale
  3. CDecreasing returns to scale, a sign of diseconomies of scale in the long runCorrect
  4. DAllocative inefficiency caused by price distortion

Explanation

When inputs double but output rises less than proportionately (60% against 100%), returns to scale are decreasing. In the long run this points to diseconomies of scale and rising average cost.

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