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JAMB Economics 1991 Question 9

Question 9

Theory of Costs and Revenue

Consider the diagram where XYZ represent the average cost curve of a firm. XY shows that as output increases the average declines. However, this decline cannot continue indefinitely because of

Diagram for this question
  1. A.managerial economies
  2. B.indivisibilities
  3. C.the extent of the market
  4. D.the pooling of dissimilar risks
Show the answer and explanation

Answer: C (the extent of the market)

Explanation

Average cost falls as output grows only while the market can absorb the extra output; the size (extent) of the market limits how far the firm can expand and enjoy economies.