The situation in which the long-run average cost curve exhibits economies of scale over the entire range of output is called a "natural monopoly
" Explain why, in the case of a natural monopoly, it would be cost efficient to have a single firm serve the entire market.
In the case of a natural monopoly, as a single firm expands its scale of operation, the short-run average cost curve shifts down and to the right. So long as it is big enough, a single firm could serve the entire market. By having a single firm serve the entire market, short-run (and long-run) average costs would be lower than they would if two or more firms served the same market. In the latter case, each firm would be operating a smaller scale plant than one big firm because each firm only serves part of the market. When the long-run average cost curve exhibits economies of scale over the entire range of output, moving to the left along the LRAC curve causes short-run costs to increase.
You might also like to view...
In the United States economy, what is the basic measure of money?
A) wealth B) disposable income C) M1 D) commodities
The table above shows a production possibilities frontier for an economy. If the economy tried to produce a combination of 250 loaves of bread and 800 books,
A) there is some unemployment. B) it cannot produce this combination because it lacks enough resources or technology. C) it is enjoying a free lunch. D) the tradeoff between bread and books is inefficient. E) there is full employment.
The argument that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is known as the
A) national security argument. B) diversity argument. C) infant-industry argument. D) environmental protection argument. E) national youth protection argument.
"A firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is the previous statement correct or incorrect?
What will be an ideal response?