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Chapter 3: Problem 125

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 in general, as typically due to economies of scale, the average cost per unit of production tends to decrease, not increase, as output levels rise; although, it can be true in cases where the company is experiencing diseconomies of scale.

Step by step solution

01

Understand the Statement

Firstly, understand the statement thoroughly. Here, it's being claimed that as a company produces more of a certain product, average production cost per unit increases. This suggests that producing a higher quantity of goods proportionally raises the cost of production per unit.
02

Understand the Concepts involved

With increasing production, initially due to economies of scale, companies often experience a decrease in the average cost per unit. Economies of scale often arise due to factors such as purchasing in bulk (which can lower the per-unit cost of raw materials), spreading fixed costs (like buildings and machinery) over a larger number of units, and operational efficiencies that come with larger scale.
03

Evaluate the Statement

Relate the statement with the concept of economies of scale. If output is increasing and average cost per unit is also increasing, it implies diseconomies of scale. This could be due to reasons like overutilization of resources, management problems, increased waste with increased production etc. However, this is not generally the norm and it depends on company's individual situations. It's typically expected that average cost per unit decreases, not increases, as production increases until the company hits diseconomies of scale.

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