CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A firm's total cost of producing 400 units is Rs 40,000. When it expands all inputs and produces 1,000 units, total cost is Rs 85,000. What is the change in long-run average cost per unit, and what does it indicate?
Average cost falls from Rs 100 (40,000 divided by 400) to Rs 85 (85,000 divided by 1,000), a fall of Rs 15 per unit. A falling long-run average cost as output expands indicates economies of scale.
- AFalls by Rs 15, indicating economies of scaleCorrect
- BRises by Rs 15, indicating diseconomies of scale
- CFalls by Rs 100, indicating economies of scale
- DFalls by Rs 15, indicating diseconomies of scale
Explanation
Average cost at 400 units = 40,000/400 = Rs 100. At 1,000 units = 85,000/1,000 = Rs 85. The change is a fall of Rs 15, which means economies of scale. Option with Rs 100 confuses the original average cost with the change.
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