The high-tech firms of Silicon Valley in California are clustered together to take advantage of which of the following economic concepts?

• A. Economies of agglomeration
• B. Perfect competition
• C. Law of diminishing returns
• D. Diseconomies of scale

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'economies of agglomeration': This refers to the benefits that firms obtain by locating near each other, such as shared suppliers, labor pools, and knowledge spillovers.
2. Recognize that 'perfect competition' describes a market structure with many firms and free entry, but it does not explain why firms cluster geographically.
3. Recall that the 'law of diminishing returns' relates to the decrease in marginal output when adding more of one input while holding others constant, which is unrelated to firm location.
4. Know that 'diseconomies of scale' occur when a firm's average costs increase as it grows larger, which is the opposite of the clustering benefit.
5. Conclude that Silicon Valley firms cluster together primarily to benefit from economies of agglomeration, which explains the geographic concentration of high-tech firms.