The correct answer is D. When long-run cost of producing a unit falls as the output increases.
Economies of scale are a situation in which a firm’s long-run average cost of production falls as output increases. This can happen for a number of reasons, such as when a firm can spread its fixed costs over a larger number of units, or when it can take advantage of specialized equipment or labor.
Option A is incorrect because a firm that is too small and too specialized may not be able to take advantage of economies of scale.
Option B is incorrect because a firm’s decision to hire inputs does not necessarily result in an increase in the input costs. For example, if a firm is able to negotiate lower prices with its suppliers as its output increases, then its input costs may actually decrease.
Option C is incorrect because a firm that is too large and overdiversified may not be able to manage its operations efficiently. This can lead to increased costs and decreased profits.
Therefore, the correct answer is D. When long-run cost of producing a unit falls as the output increases.