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Suppose the federal finance minister wants to pass a law that would require all monopolistically competitive...

Suppose the federal finance minister wants to pass a law that would require all monopolistically competitive firms to operate at their efficient scale. If this law were to pass and be enforced, what would we expect would happen to monopolistically competitive firms?

Question 31 options:

They would see their costs increase.

They would have to lower their production.

They would require subsidies to stay in business.

They would have to exit the market.
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Answer #1

Third option is correct

If monopolistically competitive firms are required to increase their production to reach the minimum efficient scale, it means that the average total cost will reduce but this step will increase production and reduce the market price charged. Profits may decline or even turn negative which means they would lose money if subsidy is not provided

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