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CA Foundation · Business Economics · Theory of Production and Cost

Which of the following is an example of an internal economy of scale enjoyed by a single firm as it expands its output?

Bulk purchase of raw materials at a discount is an internal economy of scale. It results from the firm's own larger output and buying power. Transport networks, local skilled labour and industry training institutes benefit many firms because of industry growth, so they are external economies.

  1. ADevelopment of a specialised transport network around an industrial cluster
  2. BAvailability of skilled labour due to many firms in the same locality
  3. CBulk purchase of raw materials at a discount by a large manufacturerCorrect
  4. DEstablishment of a common training institute by the industry association

Explanation

Internal economies arise within the firm from its own larger scale, such as buying raw materials in bulk at lower prices. The other options depend on the growth of the whole industry or locality, so they are external economies and cannot be attributed to one firm's expansion.

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