When diseconomies of scale occur:
Multiple Choice
A marginal cost intersects average total cost.
B the long-run average total cost curve rises.
C average fixed costs will rise.
D the long-run average total cost curve falls.
The correct answer and explanation is :
Correct Answer: B — the long-run average total cost curve rises.
Explanation (Approx. 300 words):
Diseconomies of scale refer to the increase in long-run average costs as a firm expands its production beyond an optimal size. This phenomenon occurs after a company surpasses the level of output at which it was previously experiencing economies of scale, where average costs were falling due to increased efficiency and spreading of fixed costs.
The key term here is long-run average total cost (LRATC), which reflects the per-unit cost of production when all inputs are variable, meaning the firm can adjust labor, capital, and other resources freely. In the early stages of expansion, firms often benefit from economies of scale—reduced costs per unit due to operational efficiencies, better use of equipment, specialization, or bulk purchasing.
However, beyond a certain point, further expansion leads to diseconomies of scale, and the LRATC curve starts to rise. This may be due to various factors such as:
- Managerial inefficiencies: As organizations grow, communication can become more complex and decision-making slower.
- Coordination problems: Larger firms may face challenges in coordinating tasks across multiple departments or locations.
- Worker alienation: Employees in large organizations might feel less motivated or connected to the firm’s goals, decreasing productivity.
- Overhead costs: Administrative and compliance costs may rise as operations expand.
Option B is the correct choice because it directly captures this increase in per-unit costs as a firm grows larger. The other options are incorrect:
- A refers to cost curve interactions, not diseconomies.
- C is incorrect because average fixed costs decline as output increases.
- D incorrectly describes economies of scale, not diseconomies.
Thus, when diseconomies of scale occur, the long-run average total cost curve rises, signaling that expanding production further leads to inefficiency.