Which of the following statements is correct if a firm builds a large plant and,at economic capacity output,its short-run average cost increases?
A)Decreasing returns to scale must be present.
B)Increasing returns to scale must be present.
C)Constant returns to scale must be present.
D)Decreasing,increasing and constant returns to scale are all possible.

Question

Quizplus · Accepted Answer

If a firm builds a large plant and, at economic capacity output, its short-run average cost increases, it suggests that the firm is experiencing decreasing returns to scale. This is because, in the short run, the firm may not be able to fully utilize the resources in the larger plant, leading to inefficiencies and higher costs per unit of output. As a result, the average cost increases at the economic capacity output level. Therefore, decreasing returns to scale is the only possible answer.

Which of the Following Statements Is Correct If a Firm