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The learning curve shows a relationship between the cumulative output produced and the amount of input required for each output unit.Since the output produced increases, the requirement for input per unit of output decreases. Thus, both the variables are inversely related. It happens because firms increase their efficiency with experience.

The average cost is the value of inputs per unit of total output produced. The average cost decreases with increasing cumulative output, shown by the negative coefficient of cumulative production in the average cost equation.

Thus, there is a learning curve effect in the company’s cost function.

Diseconomies of scale arise with decreasing returns to scale. Under the diseconomies of scale, the cost of inputs per unit increases with an increase in output.

The cost function of the company shows that as the output produced per year increases, the average cost of the company increases. Therefore, there are diseconomies of scale.

Case 1: In the present year:

The cumulative output (Q) is 40, plant size (q) is 10, the average cost is:

AC = 10 – 0.1Q + 0.3q

AC = 10 – 0.1×40 + 0.3×10

AC = 9

Case 2: In the next year:

The plant size (q) is 12, and the cumulative output is 50 (40 + 10). The average cost is:

AC = 10 – 0.1Q + 0.3q

AC = 10 – 0.1×50 + 0.3×12

AC = 8.6

The average cost in the next year will be $8.6 (in thousands), which is $0.4 (in thousands) lesser than this year. Thus, the average cost will decrease next year.