A Level Economics AQA Practice Exam

Which of the following describes risk bearing economies of scale?

1. Higher prices due to increased costs

2. Reduction in unit costs through diversification

3. Increased coordination among large firms

4. Higher production costs per unit

The correct answer is: Reduction in unit costs through diversification

Risk bearing economies of scale occur when firms can spread out their risks over a larger output or a more extensive range of products. This diversification allows larger firms to be more resilient against fluctuations in the market, as a downturn in one area might be offset by stability or gains in another. As a result, these firms are able to reduce their overall unit costs while managing risk effectively, which is precisely what option B conveys. In contrast, higher prices due to increased costs (the first choice) focuses on the negative aspect of cost management rather than efficiency. Increased coordination among large firms (the third choice) relates to the organizational aspect of scale rather than specifically addressing risk bearing. Finally, higher production costs per unit (the last choice) suggests inefficiency, which does not align with the concept of economies of scale, including risk bearing.