Question

Use the following two statements to answer this question:

I. Increasing returns to scale cause economies of scale.
II. Economies of scale cause increasing returns to scale.

(A) Both I and II are false.
(B) Both I and II are true.
(C) I is false, and II is true.
(D) I is true, and II is false.

Answer 1

(D) I is true, and II is false

Step-by-step explanation:

Increasing returns to scale means that during a production process, as input increases, output increases but by a larger proportion.

Economies of scale refers to the decrease in average cost per unit as a firm increases its output.

The increase in output brought about by increasing returns to scale causes cost per unit to decrease (which is economies of scale).

Therefore increasing returns to scale causes economies of scale.