Question

Which of the following statements is/are TRUE ?

• A. A firm experiences economies of scale when an increase in its output of a good or service brings a reduction in the average total cost of production
• B. A firm experiences economies of scope when an increase in its range of goods produced brings down the average total cost of production
• C. A firm experiences economies of scale when an increase in the range of products produced brings down the short-run average total cost of production
• D. A firm experiences economies of scope when an increase in its output of a good or service brings a reduction in the marginal cost of production

Answer 1

The Correct Option is A, B

To determine which statements are true regarding economies of scale and economies of scope, we must first understand the definitions of these economic concepts:

1. Economies of Scale: This occurs when an increase in the output of a firm leads to a decrease in the average total cost of production. As a firm produces more, it spreads its fixed costs over a larger number of units, reducing the average cost per unit.
2. Economies of Scope: This occurs when the production of a wider variety of goods by a firm reduces the average total cost. It means that producing multiple products together is cheaper than producing each one separately.

Now, let's assess the statements:

• Statement 1: "A firm experiences economies of scale when an increase in its output of a good or service brings a reduction in the average total cost of production." — This is true. It directly aligns with the definition of economies of scale.
• Statement 2: "A firm experiences economies of scope when an increase in its range of goods produced brings down the average total cost of production." — This is true. It matches the definition of economies of scope, where producing a variety of goods reduces costs.
• Statement 3: "A firm experiences economies of scale when an increase in the range of products produced brings down the short-run average total cost of production." — This is incorrect; this describes economies of scope, not scale, and the focus on short-run costs is a mischaracterization here.
• Statement 4: "A firm experiences economies of scope when an increase in its output of a good or service brings a reduction in the marginal cost of production." — This is incorrect; economies of scope relate to the range of products produced, not the volume of a single product.

Therefore, the true statements are: "A firm experiences economies of scale when an increase in its output of a good or service brings a reduction in the average total cost of production" and "A firm experiences economies of scope when an increase in its range of goods produced brings down the average total cost of production."