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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 to 1,000 units, total cost becomes Rs 80,000. Which of the following correctly describes the change in average cost and the likely situation?

Average cost falls from Rs 100 to Rs 80 per unit, showing economies of scale. At 400 units it is 40,000 divided by 400, and at 1,000 units it is 80,000 divided by 1,000. Falling average cost as output expands indicates scale economies.

  1. AAverage cost falls from Rs 100 to Rs 80 per unit, indicating economies of scaleCorrect
  2. BAverage cost rises from Rs 80 to Rs 100 per unit, indicating diseconomies of scale
  3. CAverage cost remains Rs 100 per unit, indicating constant returns to scale
  4. DAverage cost falls from Rs 100 to Rs 40 per unit, indicating economies of scale

Explanation

Average cost at 400 units = 40,000/400 = Rs 100. At 1,000 units = 80,000/1,000 = Rs 80. Since average cost falls as output rises, the firm enjoys economies of scale. The option reversing the figures confuses the direction of change.

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