Which of the following improves as production increases?
Multiple choice question.
Price-marginal cost relationship
Opportunity cost
Fixed costs
Price-marginal revenue relationship
The correct answer and explanation is:
Correct Answer: Fixed Costs
Explanation:
As production increases, fixed costs per unit improve (decrease) because they are spread over a larger number of goods. Fixed costs are expenses that do not change with the level of output, such as rent, salaries of permanent employees, or machinery costs.
For example, if a factory has a fixed cost of $10,000 per month, producing 100 units results in a fixed cost per unit of $100 ($10,000 ÷ 100). However, if production increases to 1,000 units, the fixed cost per unit drops to $10 ($10,000 ÷ 1,000). This reduction in per-unit fixed costs is known as economies of scale, making production more efficient and reducing overall costs.
Why Not the Other Options?
- Price-Marginal Cost Relationship: This does not always improve with production. As production increases, marginal cost (the cost of producing one more unit) may rise due to resource limitations, making the price-marginal cost relationship inconsistent.
- Opportunity Cost: Opportunity cost refers to the value of the next best alternative foregone when making a decision. It does not necessarily improve with increased production; in fact, it may increase if more resources are dedicated to one product at the expense of another.
- Price-Marginal Revenue Relationship: In a competitive market, price equals marginal revenue. As production increases, firms may have to lower prices to sell more units, which can worsen the price-marginal revenue relationship rather than improve it.
Thus, fixed costs improve as production increases because they are distributed over more units, lowering per-unit expenses.
Here is an infographic illustrating how fixed costs per unit decrease as production increases. It includes a graph showing the declining fixed cost per unit with production growth, along with factory elements like workers, machinery, and raw materials to emphasize manufacturing efficiency. Let me know if you need any modifications!
