Increasing Returns to Scale and its Implication on AC:

Definition of Increasing Returns to Scale:

When the output of a firm increases in proportion to the increase in all inputs, it is said to exhibit increasing returns to scale. In other words, if a firm doubles its inputs, and output more than doubles, then it is said to exhibit increasing returns to scale.

Implication of Increasing Returns to Scale on AC:

The implication of increasing returns to scale on AC (Average Cost) can be explained as follows:

Decreasing Average Cost:

When a firm is experiencing increasing returns to scale, it means that the cost per unit of output decreases as the level of production increases. Thus, there is a decrease in the average cost of production as the firm produces more. This happens because the firm is able to spread its fixed costs over a larger output, resulting in lower average cost.

Reason for Decreasing Average Cost:

The reason for decreasing average cost can be explained as follows:
- As the level of production increases, the fixed costs of the firm are spread over a larger output.
- This results in a decrease in the fixed cost per unit of output.
- The variable costs, on the other hand, tend to increase with the level of production but at a slower rate.
- This results in a decrease in the variable cost per unit of output.
- Thus, the total cost per unit of output decreases, resulting in a decrease in the average cost of production.

Conclusion:

In conclusion, increasing returns to scale imply that the average cost of production decreases as the level of production increases. This happens because the firm is able to spread its fixed costs over a larger output, resulting in lower average cost. Therefore, the correct answer is (c) decreasing.