Economies of scale occur when which of the following is true?

• A. Costs rise as output increases.
• B. Costs stay constant regardless of output.
• C. Labor costs decrease with output while capital costs rise.
• D. Costs fall as output increases because fixed costs are spread over more units; example: a large car factory spreading fixed capital costs.

Answer: (D)

Economies of scale occur when increasing production lowers the average cost per unit because fixed costs are spread over more units. For example, a large car factory has expensive machinery and buildings; as it produces more cars, that fixed investment is allocated across a greater number of units, reducing the cost per car. This can be helped by additional efficiencies like specialized labor, bulk purchasing, and better use of equipment, all contributing to lower per-unit costs as output grows.

The other statements don’t fit because rising costs with more output describe diseconomies of scale, constant costs with output imply constant returns to scale, and shifting the input mix (lower labor costs but higher capital costs) doesn’t inherently guarantee lower average costs across more units. The core idea is spreading fixed costs and gaining efficiency to reduce cost per unit as production expands.