Question

Assume that Mr. Gonzalez’ company doubles the output of its keyboard-covers and, as a result, the long-run average cost of producing keyboard-covers increases. Would the increase in average cost be due to diminishing marginal returns or diseconomies of scale? Briefly explain your answer.

Answer 1

This happens due to Diseconomies of scale. Diseconomies of scale are a result of a company being too ambitious and growing too large or too fast than its capacity or ability. The company experiences a higher cost of production when it increases capacity as the resources will not ben used efficiently now. Thereby increasing total cost of output.

In this case, the company doubles the output, but is not efficient to handle such rise in quantity. Thus, its average costs of production in the long run would rise due to diseconomies of scale.

Law of diminishing marginal returns talks about a decrease in output while the diseconomies of scale talks about a rise in price of production. Thus it is valid in this case instead of diminishing returns.

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