If a returns-to-scale industry has a minimum point at 1 million and the market is 500...

If a returns-to-scale industry has a minimum point at 1 million and the market is 500 thousand, how many firms are likely to be in the market? (2)

If a returns-to-scale industry has a minimum point at 1 million, and the market is 3 million, how many firms are likely to be in the market? (2)

Solutions

Expert Solution

Returns to scale is the bottom of the long run average cost curve. This is the cost where the firm will have largest economies of scale at the minimum cost in long ru.

Returns to scale quantity = 1 million = 1000 thousand

Market Demand = 500 thousand

Since the market demand < returns to scale quantity, in this situation market will end up with a single firm producing 500 thousand quantity i.e. it would be a monopoly. If any competitor tries to compete in this monopoly market, he will produce less than 500 thousand units and will have higher average cost. So it will not be able to survive in lon run without losing money.

Hence, monopoly with only 1 firm in the market.

Returns to scale quantity = 1 million

Market Demand = 3 million

Since the market demand > returns to scale quantity, in this situation market is set for competition between many firms and each firm would produce 1 million units of output. hence number of firms = market demand / returns to scale quantity = 3 / 1 = 3 firms.

Hence, 3 firms ae likely to be in the market.

Rahul Sunny answered 5 months ago

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