Correct Option: B. Economies of Scale Detailed Explanation: When we talk about a firm doubling its output and experiencing a cost increase of only 60%, we are examining the relationship between output and costs, which is a key concept in economics known as economies of scale.

1. Understanding Economies of Scale:
2. Economies of scale occur when a firm's average costs per unit decrease as it increases its level of production. This can happen for several reasons, such as:
   • Operational efficiencies: Larger production runs can lead to more efficient use of resources.
   • Bulk purchasing: Firms can often buy inputs in larger quantities at a lower price per unit.
   • Specialization: As firms grow, they can afford to hire specialized workers, which can increase productivity.
3. Analyzing the Given Situation:
4. The firm doubles its output, which means it increases production from Q to 2Q.
5. The costs increase by 60%. If we denote the original cost as C, the new cost after doubling output is: [ \text{New Cost} = C + 0.6C = 1.6C ]
6. To find the average cost per unit before and after the increase in output:
   • Before: Average Cost (AC) = ( \frac{C}{Q} )
   • After: Average Cost (AC) = ( \frac{1.6C}{2Q} = \frac{0.8C}{Q} )
7. By comparing the average costs:
   • Before: ( \frac{C}{Q} )
   • After: ( \frac{0.8C}{Q} )
8. The average cost per unit has decreased from ( \frac{C}{Q} ) to ( \frac{0.8C}{Q} ). This indicates that the firm is experiencing economies of scale because the cost per unit has decreased as output has increased.

Why Other Options Are Incorrect:

• A. Increase Cost:
• This option is misleading. While the total cost has increased, the average cost per unit has decreased. Simply stating "increase cost" does not capture the relationship between output and average cost, which is crucial in this context.
• C. Decreasing Returns:
• Decreasing returns to scale occur when increasing the input leads to a less than proportional increase in output. In this case, the firm is increasing output (doubling it) and experiencing a lower increase in costs (60%). This indicates that the firm is not facing decreasing returns; rather, it is benefiting from economies of scale.
• D. Decreasing Cost:
• While the average cost per unit is decreasing, the term "decreasing cost" is vague and does not specifically address the relationship between output and costs. It does not convey the concept of economies of scale, which is the more precise term for this situation.

Revision Summary:

• Economies of scale occur when average costs decrease as output increases.
• In this scenario, the firm doubles its output while costs increase by only 60%, leading to a lower average cost per unit.
• The correct answer is B because it accurately describes the relationship between output and costs.
• Understanding the difference between total costs and average costs is crucial in analyzing production efficiency.