Suppose you are the CEO of a utility company and your production manager informs

Question

Suppose you are the CEO of a utility company and your production manager informs you that as the company increases the level of capital and labor by 2%, output increases by 2.5%. From this information you know that that production in your company exhibits

economies of scale, hence increasing the scale of operations will decreases the minimum average cost.

diseconomies of scale, hence increasing the scale of operations will increase the minimum average cost.

constant returns to scale, hence increasing the scale of operations will not change the minimum average cost.

all of the above

economies of scale, hence increasing the scale of operations will decreases the minimum average cost.

diseconomies of scale, hence increasing the scale of operations will increase the minimum average cost.

constant returns to scale, hence increasing the scale of operations will not change the minimum average cost.

all of the above

Explanation / Answer

A.

Increase is output is more than increase in labor and capital. It means company is experiencing ecinomies of scale, when further increase in labor and capital will decrease aveage total cost. It occurs due to labor division, specialization etc

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