Question

In: Economics

Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic...

Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run?

Solutions

Expert Solution

Answer

In 1970s, USA faced several economic issues in the field of automobile industry. Due to high competition from industries of foreign countries and increase in the price of oil to used in automobile industry, the industry of USA was affected much. Later, the industry picked up. But, in the year 2008, again USA automobile industry fall into same issues. Automobile industries usually expand their production to a large scale. Then they should concentrate not to make an increase in cost as it will lead to diseconomies of scale.

When production increases, fixed cost will be allocated to a higher volume of output. Variable cost per unit and fixed cost per unit will decline and thus the production efficiency will increase. This shows economies of scale. But whenever, the output goes beyond a particular limit of output, then the average costs will rise. It may lead to dis economies of scale.

And, when demand is reducing and the actual output couldn't be sold due to various issues, the firm may not survive in the long-run. The reduction in demand may be due to demand for foreign automobiles or increase in fuel price or lack of quality or efficiency.

According to the question, there are four domestic auto manufacturers. As the demand for domestic autos is not greater than 2.5 times the quantity produced at the bottom of the long-run average cost curve, any one of the four firms will not exist in the long run. Also, at least any one of the four firms will be striving to face such a difficult situation.


Related Solutions

Suppose there exists external economies of scale in an industry located in country X. If country...
Suppose there exists external economies of scale in an industry located in country X. If country X moves from free trade to autarky, it necessarily loses welfare. Explain in detail, using any relevant diagrams, whether the above statement is true, false or uncertain.
Suppose there exists external economies of scale in an industry located in country X. If country...
Suppose there exists external economies of scale in an industry located in country X. If country X moves from free trade to autarky, it necessarily loses welfare. Explain in detail, using any relevant diagrams, whether the above statement is true, false or uncertain.
Why is it that if an industry is operating under conditions of internal scale economies then...
Why is it that if an industry is operating under conditions of internal scale economies then the resultant equilibrium cannot be consistent with the pure competition model?
Why protect an industry could be beneficial or not beneficial in internal economies of scale? What...
Why protect an industry could be beneficial or not beneficial in internal economies of scale? What examples of industries observe the phenomenon of internal economies of scale?
How can regional concentration of firms in an industry lead to external economies of scale? Give...
How can regional concentration of firms in an industry lead to external economies of scale? Give examples of these types of industrial clusters in the United States. Are they always beneficial?
(8 marks) Suppose that cars are an external economies of scale good. Imagine that the US...
Suppose that cars are an external economies of scale good. Imagine that the US has an initial (head start) advantage in car production. Mexico has not produced any cars, but is considering entering the car industry. Despite the US’s initial advantage in car production, Mexico is able to enter car production and eventually becomes the world’s only producer of cars. Draw a diagram with a forward falling supply curve for each country (and any other curves you may need) that...
1. The minimum efficient scale of production is such that an industry has only four large...
1. The minimum efficient scale of production is such that an industry has only four large firms. This would be termed ____________. A. a four-firm industry B. an oligopoly C. a cartel D. a natural monopoly 2. In an oligopoly with a few large firms, which of the following is true? A. Each firm has independent control over the price it sets. B. Firms are interdependent. C. Firms fail to try to maximize profits. D. Each firm adjusts its price...
Countries often implement various trade restrictions in international markets to protect their domestic economies. Suppose a...
Countries often implement various trade restrictions in international markets to protect their domestic economies. Suppose a trading partner of the United States imposes a tariff on our goods. What would we expect to happen in the market to measures like prices, quantities of goods exchanged, exchange rates, employment and/or welfare? Can you suggest an alternative policy that might improve the foreign country’s economy without resorting to a tariff?
Suppose that wages in the automobile industry increase. The labor supply curve for other types of...
Suppose that wages in the automobile industry increase. The labor supply curve for other types of manufacturing jobs should shift ____ and the number of workers available at any given wage rate will _____. right; decrease left; increase left; decrease right; increase
4. Suppose that fixed cost for a firm in the automobile industry (start up costs of...
4. Suppose that fixed cost for a firm in the automobile industry (start up costs of factories, capital equipment, and so on) is $5 Billion and that the variable cost is $17,000 for each automobile produced. Because more firms increase competition in the market, the market price falls as more firms enter an automobile industry, or specifically, P = 17,000 + (150/n), where n represent the number of firms in the industry. Assume that the initial size of the automobile...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT