3.3.3 Economies and diseconomies of scale Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Internal economies of scale are:

   • Benefits from a fall in demand for the firm's product
   • Cost savings from government subsidies paid to all firms
   • Cost advantages from growth that arise within the firm itself
   • Cost advantages from the growth of the whole industry around the firm

2. External economies of scale are:

   • Savings from paying lower salaries to the firm's senior managers
   • Savings from merging two firms into a single larger business
   • Cost advantages to a firm from growth of the industry, such as a local pool of skilled labour
   • Cost advantages from the firm's own larger plant and equipment

3. Purchasing economies of scale arise from:

   • Hiring managers at higher salaries than competitors
   • Raising output without using any additional inputs at all
   • Buying inputs in bulk at lower unit prices
   • Selling products at higher prices in larger markets

4. Diseconomies of scale are:

   • Rising average costs from excessive size, such as communication problems and coordination costs
   • Lower wages paid to workers as a result of a larger scale
   • Falling average costs from specialisation of labour and machines
   • Costs falling because of bulk discounts from suppliers

5. Minimum efficient scale is defined as:

   • The output at which short-run costs are zero for the firm
   • The highest output a firm can physically produce in one period
   • The output at which demand equals supply in every market
   • The lowest output at which long-run average cost is minimised

6. Which is an internal economy of scale?

   • A government grant for training workers in an industry
   • Technical economies from using larger, more efficient machinery
   • A local pool of skilled labour that serves all firms in the area
   • Improved transport links built by the government in the region

7. Which is an example of an external economy of scale?

   • A firm's bulk purchasing discount on its own raw materials
   • Managerial specialisation within a single firm's head office
   • A regional cluster of specialist suppliers reducing costs for all firms in the area
   • A large plant spreading overheads over more units of output

8. Lenders charge large firms lower interest rates. Which economy of scale does this illustrate?

   • Technical economies, from the use of more efficient machinery
   • Marketing economies, from spreading advertising costs
   • Financial economies of scale, since large firms are seen as less risky and can offer more collateral
   • Diseconomies of scale, from the risks of being large

9. Managerial diseconomies of scale arise when:

   • Layers of management slow decisions down and information becomes distorted as it passes through them
   • There are too few managers to supervise the workforce adequately
   • Output is produced with fewer inputs than before
   • Workers become highly specialised and so more productive

10. A firm doubles all its inputs and output more than doubles. What is this called?

    • Constant returns to scale
    • Diminishing marginal productivity
    • Decreasing returns to scale
    • Increasing returns to scale

11. Why might minimum efficient scale matter for market structure?

    • If MES is a large share of market demand, the market may support only a few firms, favouring oligopoly or monopoly
    • MES has no effect on the number of firms that can operate
    • MES is only relevant to government planning and not to firms
    • MES always leads to perfect competition with many firms in the market

12. A large firm can insure its risks more cheaply by spreading them across many products. Which economy does this describe?

    • Marketing economies of scale
    • Technical economies of scale
    • Diseconomies of scale from coordination problems
    • Risk-bearing economies of scale

13. Which is an example of a marketing economy of scale?

    • Paying higher rent for each unit of output produced
    • Spreading advertising costs over a larger output
    • Increasing transport costs per unit delivered to customers
    • Losing brand recognition as the business expands

14. Which is a risk-bearing economy of scale?

    • Diversification across products reduces the impact of a fall in demand in one market
    • Paying higher insurance premiums per unit of output produced
    • The cost of a single product risk always rising with output
    • Losing all customers if demand falls in any market

15. A firm has total cost TC = 1,000 + 5Q. What is average total cost at Q = 100?

    • £10
    • £150
    • £5
    • £15

16. A firm's long-run average cost falls from £20 to £14 per unit as output rises from 1,000 to 3,000. What does this indicate?

    • Constant returns to scale, with average costs unchanged
    • Diminishing marginal productivity in the long run
    • Economies of scale, with average costs falling as output rises
    • Diseconomies of scale, with average costs rising as output rises

17. Evaluate: does growth always produce economies of scale?

    • No, growth never affects cost in any firm or market
    • Yes, growth always reduces average cost whatever the size of the firm
    • No: beyond minimum efficient scale, diseconomies may set in, so further growth can raise average costs
    • Yes, unless the firm is a monopoly in its market

18. Minimum efficient scale is 20,000 units and market demand is 60,000 units. How many firms could operate at MES?

    • One firm
    • Sixty firms
    • Three firms
    • Six firms

19. Why might a small firm be unable to realise a technical economy of scale?

    • Indivisible machinery needs a minimum scale of output to be used efficiently
    • Technical economies only arise from decisions made by managers
    • Machinery is always divisible into any size a small firm needs
    • Small firms always have larger plants than big firms in the market

20. Evaluate the statement: 'Internal economies of scale always benefit consumers.'

    • False, because scale can never lower costs for any firm at all
    • True, because costs always fall directly to consumers in every market
    • Overstated: lower costs may reach consumers as lower prices, but firms may keep the margin, especially with market power
    • True only for external economies, never for internal ones

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