The figure given below shows three Short Run Average Total Cost (SRATC) curves and the Long Run Average Total Cost (LRATC) curve of a firm.Figure 8.3

-In the electricity generation industry, the cost per kilowatt hour of electricity declines as the capacity to generate output increases. This situation represents:
A)a poor opportunity for investors.
B)constant returns to scale.
C)diseconomies of scale.
D)economies of scale.
E)decreasing returns to scale.

Question

The figure given below shows three Short Run Average Total Cost (SRATC) curves and the Long Run Average Total Cost (LRATC) curve of a firm.Figure 8.3
 
-In the electricity generation industry, the cost per kilowatt hour of electricity declines as the capacity to generate output increases. This situation represents:
A)a poor opportunity for investors. 
B)constant returns to scale. 
C)diseconomies of scale. 
D)economies of scale. 
E)decreasing returns to scale.

Quizplus · Accepted Answer

The situation mentioned in the question where the cost per kilowatt hour of electricity declines as the capacity to generate output increases is an example of economies of scale. This means that as the firm increases its scale of operations, the average cost of producing each unit of output decreases. Therefore, D is the correct answer.

The Figure Given Below Shows Three Short Run Average Total