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Difficulty: MediumScales of Production and Economies of Scale

A commercial poultry feed processing firm operating in Kaduna State expands its manufacturing plant and installs automated milling machinery. Consequently, its long-run average cost per unit declines due to the mechanical efficiency and high capacity of the new capital equipment. Which specific category of internal economies of scale is this firm experiencing?

  1. Technical economy of scaleAnswer
  2. B
    External economy of scale
  3. C
    Short-run variable cost reduction
  4. D
    Fixed cost allocation shift

Answer

Technical economy of scale
The reduction in long-run average cost is directly achieved through the individual firm's investment in larger, more efficient, and specialized automated machinery. Cost advantages derived from capital equipment performance are technical economies of scale.

Step-by-Step Solution

1
Determine whether the cost saving originates internally within the enterprise or externally from the industry.
The lower unit cost stems directly from decisions made within the individual firm to expand its plant and machinery.
Cost advantages generated inside an individual growing firm are classified as internal economies of scale.
2
Identify the primary source of the internal efficiency gain.
The cost reduction is driven by mechanical efficiency and capital equipment specialization.
Efficiency gains tied directly to advanced machinery and production methods represent technical economies of scale.

Key Concept

Technical economies of scale
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Topics

Scales of Production and Economies of Scale

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