The larger a firm, the lower its cost of production this statement explains the?

A. law of diminishing marginal returns
B. concept of economies of scale
C. law of comparative cost advantage
D. theory of division of labour

Correct Answer: Option A

A. law of diminishing marginal returns

Explanation

Diminishing returns, also called law of diminishing returns or principle of diminishing marginal productivity, economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.

In the classic example of the law, a farmer who owns a given acreage of land will find that a certain number of labourers will yield the maximum output per worker. If he should hire more workers, the combination of land and labour would be less efficient because the proportional increase in the overall output would be less than the expansion of the labour force.