Advantages of Small Firms vs. Large Firms

Steps:

• Recall key advantages: small firms excel in communication and independence due to simpler structures.
• Note disadvantages: small firms face higher average costs from lacking economies of scale.
• Evaluate choices: match "better communication" and "greater independence" as yes, "lower average cost" as no.
• Select option aligning with these economic principles.

Why C is correct:

• Small firms have flatter hierarchies enabling better communication and quicker decisions (greater independence), but larger firms achieve lower average costs via economies of scale, where fixed costs spread over more output (per unit cost formula: ATC = TC/Q decreases as Q rises).

Why the others are wrong:

• A: Incorrectly denies communication and independence advantages while affirming lower costs, which large firms hold.
• B: Misses better communication as a key small-firm strength.
• D: Erroneously includes lower average costs, ignoring economies of scale favoring large firms.

Final answer: C