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Difficulty: MediumLong-Run Costs and Production

A solar panel manufacturing company expands its operational scale and factory size over time. Beyond a specific output capacity, the firm encounters managerial bottlenecks, communication inefficiencies, and rising administrative overhead per unit, causing per-unit costs to rise. What economic concept does this upward-sloping section of the Long-Run Average Total Cost (LRATC) curve illustrate?

  1. Diseconomies of scaleAnswer
  2. B
    The short-run law of diminishing returns
  3. C
    Rising fixed costs associated with larger plant sizes
  4. D
    External localization economies of scale

Answer

Diseconomies of scale
The correct answer is diseconomies of scale. When a firm expands its scale of operation in the long run where all inputs are variable, administrative overhead and management coordination difficulties can lead to an increase in long-run average costs per unit of output.

Step-by-Step Solution

1
Distinguish between short-run and long-run economic production horizons
In the long run, all factors of production are variable and there are no fixed costs.
Plant capacity and scale can be fully adjusted in the long run.
2
Analyze the relationship between scale of output and long-run average cost
When long-run average costs increase as output expands, the firm experiences internal scale inefficiencies.
Management difficulties and coordination problems increase per-unit production costs.
3
Identify the corresponding term for rising long-run average total cost
This upward-sloping region of the LRATC curve corresponds to diseconomies of scale.
It reflects decreased efficiency when operating beyond the optimal scale of production.

Key Concept

Long-Run Average Total Cost and Scale Inefficiencies
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Topics

Long-Run Costs and Production

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