Question

External economies of scale occur when average costs of a​ firm: A. rise as the industry grows larger. B. fall as the industry grows​ larger, but may or may not rise as the representative firm grows larger. C. fall as the representative firm and industry grows larger. D. remain constant.

Answer 1

We are required to explain how external economies of scale occur with a change in average costs of firm

• Economies of scale can be defined as the rise in output as cost per unit decrease.

• External economies of scale occur when average costs of a firm "fall as the representative firm and industry grows larger."

• External economies of scale occur when a industry grows larger and representative firms benefit from lower long-run average costs.

• External economies of scale can also be called positive external benefits of industrial expansion.

Therefore, External economies of scale occur when average costs of a firm "fall as the representative firm and industry grows larger."

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