Suppose that an oil refinery is considering building a new plant. It has estimat

Question

Suppose that an oil refinery is considering building a new plant. It has estimated that for the relevant range of expected production, the average total cost will decrease as the production level of output increases. Thus, over this range of production, the firm has

a. diseconomies of scale (decreasing returns to scale).

b. no economies of scale (constant returns to scale).

c. economies of scale (increasing returns to scale).

d.         negative economic profit.

e.         negative marginal revenue.

Explanation / Answer

Ans) the correct option is c. economies of scale (increasing returns to scale). When firm's average total cost declines as production or output increases then there are economies of scale.

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