CA Foundation · Business Economics · Theory of Production and Cost
A firm's long-run total cost is ₹6,00,000 at 1,000 units and ₹9,00,000 at 2,000 units. Which conclusion is correct for this output range?
The firm enjoys economies of scale, because long-run average cost falls from ₹600 at 1,000 units to ₹450 at 2,000 units. A rise in total cost alone does not show diseconomies; only a rising average cost would.
- AThe firm enjoys economies of scale because LRAC falls from ₹600 to ₹450Correct
- BThe firm faces diseconomies of scale because total cost has risen
- CThe firm faces constant returns to scale because total cost rises
- DThe firm enjoys economies of scale because marginal cost is ₹900
Explanation
LRAC at 1,000 units = 6,00,000/1,000 = ₹600. At 2,000 units = 9,00,000/2,000 = ₹450. Falling average cost indicates economies of scale. Rising total cost is normal and does not indicate diseconomies. The incremental cost per unit is ₹300, not ₹900.
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