Question

Which of the following statements is/are CORRECT for diseconomies of scale?

• A. The elasticity of cost with respect to output is less than one.
• B. The elasticity of cost with respect to output is greater than one.
• C. The elasticity of cost with respect to output is equal to one.
• D. Marginal cost is greater than average cost.

Hint:

In diseconomies of scale, the cost rises faster than output, leading to higher marginal costs compared to average costs.

Answer 1

The Correct Option is B

Step 1: Understand diseconomies of scale.
Diseconomies of scale occur when a firm expands its production, and the cost per unit increases due to inefficiencies. This typically happens when a firm grows too large and starts experiencing internal inefficiencies.
Step 2: Analyze each option.
- Option (A) is incorrect because in diseconomies of scale, the cost increases disproportionately with output. This means the elasticity of cost with respect to output is greater than one.
- Option (B) is correct. Diseconomies of scale lead to a situation where the elasticity of cost with respect to output is greater than one, meaning that cost increases at a faster rate than output.
- Option (C) is incorrect because when a firm experiences diseconomies of scale, the cost elasticity is greater than one.
- Option (D) is correct because, under diseconomies of scale, marginal cost is greater than average cost, which indicates increasing costs with additional output.
Final Answer: \[ \boxed{\text{The elasticity of cost with respect to output is greater than one in diseconomies of scale.}} \]