Question

Question 2

a. Define economies and diseconomies of scale and explain why they occur. [4 marks]

b. Explain the relationship between total product, marginal product, and average product. [3 marks]

c. What is the law of diminishing returns and what does it explain the shape of the short run average cost curve. [3 marks]

d. Why is the level of output at which marginal revenue equals marginal cost the profit maximizing output? [4 marks]

Answer 1

a. Define economies and diseconomies of scale and explain why they occur.

Answer : Economies of scale refers to the cost advantages that a firm can achieve by expanding its production in the long run . The cost advantages are achieved in the form of lower average costs per unit . The marginal costs decreses as production increases . They occur due to many reasons such as : technological development , lower rate of interests in borrowing , market economies etc .

Diseconomies of scale is opposite of economies of scale , the marginal costs increases as production increases . Diseconomies of scale result in rising long run average costs which are experienced when a firm expands beyond its optimum scale . Inefficieny , coordination problem , saturation in production process , lack of innovation causes diseconomies of scale .