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Chapter 3: Problem 126

Determine whether each statement makes sense or does not make sense, and explain your reasoning. As production level increases, the average cost for a company to produce each unit of its product also increases.

Short Answer

Expert verified
The statement does not make sense under normal circumstances, because it contradicts the principle of economies of scale where the average cost per unit produced typically decreases with increased production. Exceptions could exist if other factors cause the cost per unit to increase with production.

Step by step solution

01

Understand the Concept of Average Cost

The average cost is the total cost of production divided by the number of goods produced. It incorporates both fixed costs and variable costs.
02

Understand the Impact of Increased Production on Average Cost

If the production level increases, the total cost to produce each additional unit of product (marginal cost) generally decreases. This is due to the law of diminishing marginal cost, where efficiencies are gained as manufacturing processes scale up. As such, the average cost per unit produced often decreases with increased production.
03

Analyze the Statement

The statement suggests that the average cost for a company to produce each unit of its product increases as the production level goes up. This contradicts the principle of economies of scale, where the cost per unit often decreases as production volume increases (to a certain extent). Unless there are factors driving up the cost per unit with increasing production, such as limited resources leading to increased raw materials prices, this statement does not make sense.

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