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

A firm's long-run average cost curve is U-shaped with its minimum at 5,000 units, where average cost is Rs 60. At 8,000 units, average cost is Rs 66. Which statement is correct?

At 8,000 units the firm has passed its minimum efficient scale and faces diseconomies of scale. Average cost is lowest at 5,000 units, Rs 60, and rises to Rs 66 at 8,000 units. Rising long-run average cost with output indicates diseconomies of scale.

  1. AAt 8,000 units the firm experiences economies of scale because output is higher
  2. BAt 8,000 units the firm has passed the minimum efficient scale and faces diseconomies of scaleCorrect
  3. CAt 5,000 units the firm faces diseconomies of scale because average cost is lowest
  4. DAt 8,000 units the firm experiences constant returns to scale because average cost is below Rs 100

Explanation

Average cost is lowest at 5,000 units, which is the minimum efficient scale. Beyond it, average cost rises from Rs 60 to Rs 66 at 8,000 units, which signals diseconomies of scale. Higher output alone does not imply economies; the direction of average cost decides.

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