4.1.4.5 Economies and diseconomies of scale Quiz: AQA Economics, Unit 1

The 20 questions

1. Economies of scale are best described as:

   • rises in average cost as the scale of output increases.
   • the fixed costs of a firm as output falls.
   • falls in average cost as the scale of output increases.
   • falls in total revenue as output rises.

2. Which of the following is an internal economy of scale?

   • Bulk buying of raw materials that reduces the unit cost for a large firm.
   • Improved road links to a region that lower transport costs for all firms there.
   • A government grant given to all firms in an industry.
   • A cluster of related firms that share a pool of skilled labour in the area.

3. Which of the following is an external economy of scale?

   • Technical economies from using larger machinery.
   • A local pool of skilled labour that benefits all firms in an industry cluster.
   • Financial economies from access to cheaper loans as the firm grows.
   • Managerial economies from specialised managers.

4. Which of the following is a diseconomy of scale?

   • Communication problems that arise in a very large organisation with many layers of management.
   • Specialist machinery used efficiently in a large plant.
   • Access to cheaper finance for a large firm.
   • Bulk buying discounts for a large firm.

5. Which of the following best describes the link between returns to scale and economies of scale?

   • Increasing returns to scale tend to create economies of scale, which lower average cost as output rises.
   • Economies of scale are unrelated to returns to scale.
   • Decreasing returns to scale create economies of scale.
   • Constant returns to scale always produce economies of scale.

6. The minimum efficient scale (MES) of production is:

   • the highest output a firm can produce in the short run.
   • the output at which fixed costs equal variable costs.
   • the output at which total revenue is maximised.
   • the lowest output at which long-run average cost reaches its minimum.

7. A market has a minimum efficient scale that is a very large share of total market demand. What is the likely effect on the market structure?

   • It eliminates all monopoly power in the market.
   • It makes entry to the market extremely easy for new firms.
   • It tends to support a small number of large firms, and may create barriers to entry for new firms.
   • It encourages many small firms, because there are no economies of scale.

8. An L-shaped long-run average cost curve shows that:

   • average cost is always equal to marginal cost.
   • average cost falls to a minimum at MES and then stays roughly constant over a wide range of output.
   • average cost falls and then rises steeply as output increases.
   • average cost rises continuously as output increases.

9. Why might diseconomies of scale arise in a firm that grows very large?

   • Because managing a large workforce across many sites can cause co-ordination problems and reduce motivation.
   • Because fixed costs fall as the firm grows.
   • Because larger firms always have lower average costs.
   • Because large firms always have perfectly elastic demand.

10. A firm's long-run average cost falls from £20 to £12 per unit as output rises from 10,000 to 50,000 units. What does this indicate?

    • Increasing marginal cost.
    • Economies of scale.
    • Constant returns to scale.
    • Diseconomies of scale.

11. Which of the following is an example of a financial economy of scale?

    • A large firm borrowing at a lower interest rate than a small firm because it has more collateral and lower perceived risk.
    • A firm's workers collectively negotiating a higher wage.
    • A firm reducing its output to lower costs.
    • A firm's marketing budget falling as it grows.

12. Which of the following is an example of a technical economy of scale?

    • A firm paying higher wages to attract more workers.
    • A large steel plant using a blast furnace whose unit cost falls as its capacity increases.
    • A firm reducing advertising as its output grows.
    • A large firm losing efficiency because managers cannot co-ordinate.

13. Which of the following statements about external economies of scale is correct?

    • They arise only from a single firm's growth in size.
    • They result in higher average costs for all firms in the industry.
    • They arise from the growth of an industry or area, and they benefit all firms located there.
    • They always make firms less competitive.

14. Which statement best evaluates the significance of economies of scale for consumers?

    • Economies of scale may allow lower prices for consumers, but larger firms may also gain market power that reduces competition.
    • Economies of scale have no effect on the price consumers pay.
    • Economies of scale always harm consumers by reducing competition.
    • Economies of scale only affect firms in the public sector.

15. A firm's long-run average cost curve is U-shaped. At which output is minimum efficient scale reached?

    • At zero output.
    • At the output where the curve is at its minimum point.
    • At the output where the curve is at its highest point.
    • At every output on the curve.

16. Which of the following is most likely to cause an industry to have high barriers to entry because of economies of scale?

    • A low MES relative to market demand, which allows many small firms.
    • A high MES relative to market demand, which means new entrants must be large to compete on cost.
    • Free access to all inputs at zero cost.
    • A very small number of consumers in the market.

17. Using the idea of diseconomies of scale, which statement best explains why a firm might choose to split into smaller divisions?

    • To reduce co-ordination problems and keep average costs lower, if diseconomies of scale have arisen.
    • To increase the number of managers without any change in output.
    • To eliminate all economies of scale.
    • To ensure that its fixed costs rise.

18. Which of the following correctly summarises the shape of the long-run average cost curve?

    • It shows average cost equal to total revenue.
    • It shows average cost rising continuously with output.
    • It shows average cost constant at every output.
    • It shows average cost falling with economies of scale, possibly reaching a minimum, and then possibly rising with diseconomies of scale.

19. A large firm enjoys lower unit costs because it buys components in bulk. Which type of economy is this?

    • An internal purchasing economy of scale.
    • A constant returns to scale.
    • An external economy of scale.
    • A diseconomy of scale.

20. Which of the following best evaluates the claim that all large firms are efficient because they benefit from economies of scale?

    • The claim is always correct because size guarantees efficiency.
    • The claim is overstated, because very large firms may face diseconomies of scale that raise their average costs.
    • The claim is correct only for firms in the public sector.
    • The claim is incorrect because economies of scale do not exist.

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