External economies of scale are obtained by:
Options
AA firm
BA group of firms
CSmall production
DSociety
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Theory of Production and CostPYQ - Nov 2020Question 45 of 20
All Questions Correct Answer
✅ Option b — A group of firms
All Options:
- AA firm
- BA group of firms
- CSmall production
- DSociety
Detailed Solution & Explanation
To understand external economies of scale, we need to consider the concept of economies of scale, which refers to the cost advantages that firms can achieve by increasing their production. External economies of scale occur when a group of firms or an industry as a whole benefits from certain factors that reduce costs.
• The key idea here is that these benefits are not internal to a single firm, but rather external, affecting multiple firms.
• This can happen when a group of firms in the same industry or location can share resources, expertise, or infrastructure, leading to lower costs for all of them.
• For example, a group of firms in a particular region can benefit from the presence of specialized labor, transportation networks, or research institutions, which can reduce their costs and increase efficiency.
The correct answer is right because external economies of scale are indeed obtained by a group of firms, as they can take advantage of shared resources and expertise.
• Option A, a firm, is incorrect because it refers to internal economies of scale, which occur within a single firm.
• Option C, small production, is also incorrect because external economies of scale are more likely to occur with a larger number of firms or a larger scale of production.
About This Chapter: Theory of Production and Cost
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Function, Cost Concepts (Short/Long Run)
This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.
View Official ICAI SyllabusExam Strategy Tip
The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.
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