A firm that packages snack foods expands output by adding layers of management and additional production lines. Based on the LRAC curve shown, which statement best explains the firm’s diseconomies of scale at high output (from to units per day)?
- Fixed costs rise with output, causing average cost to increase in the long run
- Communication and coordination problems increase per-unit costs as the firm becomes very large (correct answer)
- Marginal cost must always be below average cost in the long run, so LRAC rises
- The firm cannot change plant size in the long run, so costs rise as output increases
- Economies of scale occur because specialization falls as the firm expands
Explanation: This question tests understanding of diseconomies of scale in long-run cost analysis. Economies of scale occur when LRAC falls (specialization benefits), constant returns when LRAC is flat, and diseconomies when LRAC rises (coordination problems). The LRAC curve represents the envelope of all possible short-run cost curves, showing minimum achievable costs when all inputs are variable. At high output levels (80-120 units), the firm experiences diseconomies of scale because communication and coordination problems increase per-unit costs as the firm becomes very large—this is the correct explanation. A common misconception is that fixed costs rise with output or that firms cannot change plant size in the long run, but fixed costs are actually spread over more units and all inputs are variable in the long run. To identify causes of diseconomies, remember that as firms grow very large, layers of management multiply, communication becomes difficult, and coordination costs rise, overwhelming the benefits of specialization and causing LRAC to increase.