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Difficulty: MediumLong-Run Costs and Production

A commercial bakery doubles all of its production inputs (capital and labor), causing its daily output to expand from 500500 loaves to 1,2001,200 loaves. Which of the following best describes the effect of this expansion on the bakery's long-run unit cost and the economic principle illustrated?

  1. Long-run average cost decreases, demonstrating economies of scale.Answer
  2. B
    Long-run average cost increases, demonstrating diseconomies of scale.
  3. C
    Long-run average cost remains constant, demonstrating fixed cost amortization.
  4. D
    Long-run average cost increases, demonstrating the law of diminishing marginal returns.

Answer

Long-run average cost decreases, demonstrating economies of scale.
When a firm increases all inputs by a given proportion (100%100\%) and output increases by a greater proportion (140%140\%), the firm experiences increasing returns to scale. Spread over a larger volume of output, the long-run average cost per unit falls, which defines economies of scale.

Step-by-Step Solution

1
Calculate the percentage change in inputs.
Inputs are doubled, which represents a 100%100\% increase.
Determining input growth is required to measure returns to scale.
2
Calculate the percentage change in total output.
Output increases from 500500 to 1,2001,200 loaves, which is an increase of 1,200−500500×100%=140%\frac{1,200 - 500}{500} \times 100\% = 140\%.
Measuring output growth allows comparison against input growth.
3
Compare input and output growth to determine returns to scale and cost impact.
Since the percentage increase in output (140%140\%) exceeds the percentage increase in inputs (100%100\%), the firm experiences increasing returns to scale, leading to a decrease in long-run average cost (economies of scale).
When output expands faster than input growth, long-run unit costs fall.

Key Concept

Economies of Scale and Long-Run Average Cost
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Topics

Long-Run Costs and Production

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