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Difficulty: HardSmall Scale and Large Scale Production

In an expanding manufacturing enterprise, internal managerial economies of scale will continuously reduce average costs per unit regardless of how complex or deep the administrative hierarchy becomes.

Answer: Answer

Answer

False
The statement is false because managerial economies of scale do not operate indefinitely. When a enterprise becomes overly large, multi-layered management leads to communication gaps, slow response times, and bureaucratic inefficiency. These managerial diseconomies increase long-run average cost per unit once the firm expands beyond its optimal output capacity.

Step-by-Step Solution

1
Define managerial economies of scale and their initial benefits.
Managerial economies occur when large-scale firms employ functional specialists (e.g., finance, marketing, personnel), boosting administrative efficiency.
Establishing how managerial division of labor functions is essential for assessing cost behavior.
2
Analyze the effect of over-expansion and increased organizational depth.
As the scale of production grows excessively, communication channels lengthen, decision-making becomes slow, and supervision costs increase.
Evaluating organizational complexity reveals the emergence of internal diseconomies of scale.
3
Determine the impact on long-run average cost and evaluate the statement.
Managerial inefficiencies push average costs upward once the optimum output scale is surpassed, making the claim of perpetual cost reduction false.
Connecting administrative friction to the upward sloping segment of the long-run average cost curve confirms the statement is false.

Key Concept

Limits of Internal Economies of Scale and Managerial Diseconomies
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Topics

Small Scale and Large Scale Production

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