Economics Homework Help

Question

Babsie initially leased a one-room space and started a small day care center with only 4 children and one staff member. But he found that the costs per child were very high. When she leased a larger space, and expanded the center to have more children and staff, the cost per child fell. Which of the following factors came into play when Babsie expanded the center?

a. decreasing returns to scale

b. increasing returns to scale

c. constant returns to scale

d. none of the above

Answer 1

Correct answer: b. increasing returns to scale

As the daycare expanded, its average cost per child decreased because fixed costs such as rent and basic staffing spread over a larger number of children. The expansion allowed the business to operate more efficiently rather than simply producing more at the same cost.