Suppose a company rents a building for $250,000 a year for the purpose of manufacturing between 80,000 and 140,000 units (the relevant range of activity). The rental cost per unit of production will __________ as production levels increase.
A) behave in a nonlinear fashion
B) increase
C) decrease
D) remain fixed

Question

Quizplus · Accepted Answer

The rental cost per unit of production will decrease as production levels increase because the fixed cost of the building rental will be spread across a larger number of units produced. This is an example of economies of scale, where the average cost per unit decreases as production levels increase. Therefore, option C is the best choice.

Suppose a Company Rents a Building for $250,000 a Year