Teacher:You are given a background paragraph that describes one or more causal or qualitative relationships such as a relationship in economics or a scientific law and a story that makes use of the concepts or the relationship described in the provided paragraph. You need to come up with a question about the story that requires an understanding of the relationship described in the background paragraph. The generated question should not be answerable without both the background and story. Write a question about the story that requires a relationship in the background paragraph to answer. Check whether your question requires both the background paragraph and the story to answer. If your question can be answered by only one of these, try to rewrite your question so that it requires both. Note that "flipping" a word in the question can give rise to a new question where the answer will be different from the original question. Often, "flipping" a word gives rise to flipping the direction of the relationship, for example, from "increase" to "decrease."
Teacher: Now, understand the problem? Solve this instance: Background Paragraph: A firm with high fixed costs requires a large number of customers in order to have a meaningful return on investment. This is where economies of scale become important. Since each firm has large initial costs, as the firm gains market share and increases its output the fixed cost (what they initially invested) is divided among a larger number of customers. Therefore, in industries with large initial investment requirements, average total cost declines as output increases over a much larger range of output levels.
Story: City D's mayor wants to invite more businesses in the city. Three firms, firm A, firm B, and firm C, took advantage of this opportunity. Firm A does not require large initial costs, but firm B and firm C require
large initial costs. Firm B managed to increase its market share, but firm C failed to increase its market share.
Student:
Which firm would most likely enjoy economies of scale, firm A or firm B?