Skip to content

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

A textiles firm in Surat doubles all its inputs and finds that output rises by more than double, so its long-run average cost falls. This situation indicates:

This indicates increasing returns to scale and economies of scale. When all inputs double and output more than doubles, the cost per unit falls, so the long-run average cost curve slopes downward over this range.

  1. ADecreasing returns to scale and diseconomies of scale
  2. BIncreasing returns to scale and economies of scaleCorrect
  3. CConstant returns to scale with a flat LAC
  4. DThe law of variable proportions operating in the short run

Explanation

When all inputs are doubled and output more than doubles, there are increasing returns to scale. Cost per unit therefore falls, which means economies of scale. Option D is wrong because all inputs are varied, so this is long-run, not variable proportions.

Did you get it right without looking?

One question tells you little. A timed set on Cost of Production shows your real accuracy, how long you take and where you lose marks.

Practise Cost of ProductionFree diagnostic mock

More Cost of Production questions