Question

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?

Answer 1

This is the same scenario that happened in the United States in the 1970s. You would expect one firm will not survive in the long run because there is only demand that is enough for 2.5 firms to get to the bottom of the average cost curve. At least one firm will be struggling.

One firm will not survive in the long run and at least one firm will be struggling.