A firm scaled down its operation by reducing all inputs by 50% and experienced a less-than-50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.

Question

Quizplus · Accepted Answer

The fact that the firm experienced a less-than-50% decrease in output when it reduced all inputs by 50% indicates that it is currently experiencing diseconomies of scale at the current output level. This means that as the firm has decreased its scale of operations, its long-run average cost has increased, which suggests that it is currently operating at an inefficient scale.

A Firm Scaled Down Its Operation by Reducing All Inputs