Which of the following best explains diseconomies of scale? Increase in output causes the

Step 1: Analyze the question The question asks which option best explains diseconomies of scale, completing the stem "Increase in output causes the..."

Step 2: Explain the concept Economies of scale occur when a firm expands output and its long-run average cost (cost per unit) falls. Diseconomies of scale are the opposite: beyond a certain size, further expansion makes the average cost per unit rise. Common causes include:

• Management problems (poor coordination, communication delays)
• Labour disputes in very large firms
• Bureaucracy and red tape
• Scarcity of inputs, which pushes input prices up

Step 3: Evaluate each option

• A. Average cost to rise. This is the textbook definition of diseconomies of scale. Correct.
• B. Marginal revenue to fall. This relates to demand and pricing, not to production costs and scale.
• C. Marginal cost to fall. Falling cost is associated with economies of scale, not diseconomies.
• D. Firm to be de-stabilized. This is vague and is not the economic definition.

Step 4: Answer Diseconomies of scale means that as output increases, the average cost of production rises.

Exam tip: Link the words to the direction of average cost:

• Economies of scale = average cost falls (a "good" outcome)
• Diseconomies of scale = average cost rises (a "bad" outcome)

If you see "scale" in a question, think "average cost per unit."