Economies of scale imply that average total cost declines as output increases in the long- run. In this example, average total cost falls from $6 to $5 when production increases by 10,000 vases. It could have been caused by increasing marginal productivity if this were the short run, but that is not given as an option.

The law of diminishing returns implies that as increasing amounts of the variable input is used, the additional output associated with one more unit of input decreases. Thus, the marginal return associated with one more unit of input declines. Thus, if output increases at a decreasing rate this implies that although output increases as another unit of input is applied, it is increasing by less and less. Thus, more and more inputs are required in order to increase output by one unit.

The risk premium on a security is based on its systematic risk, not the diversifiable risk, in a well diversified investor's portfolio.

Sources of information for this step are financial statements, economic and industry data, interviews, etc.