Problem 125 - Algebra and Trigonometry

Question

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.

Step-by-Step Solution

Answer

The statement does not make sense under the general principle of economies of scale, where increasing production should decrease average costs by spreading fixed costs over more units. However, in practical scenarios, if factors such as inefficiencies, or increased costs of labor or raw materials with scale come into play, average cost per unit might increase.

Step 1: Understand the Concepts

Begin by understanding the concept of the average cost and how it changes with production level. Average cost is the total cost divided by the quantity of output produced. It often falls as quantity produced increases because the fixed costs are spread over more units of output – a concept known as economies of scale.

Step 2: Apply the Concepts

Apply the concepts to the given statement. The statement states that the average cost increases as production level increases. Contrarily, based on the concept of economies of scale, average cost typically decreases due to the allocation of fixed costs over a bigger quantity of output.

Step 3: Answer the Question

Based on the understanding of average cost and economies of scale, it can be concluded that the statement does not make sense. Usually, as the production level increases, the average cost should decrease, not increase, due to economies of scale. This is the theoretical principle, but in practice, if the costs of raw materials and labor rise significantly with scale, or if inefficiencies creep in, the average cost per unit can indeed rise.