If a firm decreases its plant size and finds that its long-run average costs have decreased, then
A)its labour is more productive in a smaller plant.
B)its diseconomies of scale are less.
C)the firm should reduce its plant size even more.
D)the firm is now profitable.

Question

Quizplus · Accepted Answer

If the firm's long-run average costs have decreased as a result of decreasing plant size, it means that the firm has experienced economies of scale. This suggests that the firm may have previously been operating beyond its minimum efficient scale, resulting in diseconomies of scale. By reducing plant size, the firm has likely eliminated some of these diseconomies and is now operating at a more efficient scale, resulting in lower long-run average costs. Therefore, choice B, that the firm's diseconomies of scale are less, is the best answer.

If a Firm Decreases Its Plant Size and Finds That