Question

Economies of scale will lead to only one firm in the industry because

A.

by increasing output a firm is able to lower the cost per unit and change lower prices driving smaller firms out of business.

B.

one firm has an average cost​ curve, which has shifted below the average cost curves of its competitors.

C.

of government licensing.

D.

there are governmental entry restrictions.

Answer 1

Answer: Option A

Economies of scale reduces the cost of producing one unit of output by increasing the production capacity. In this case, the increased output is more in quantity and this is suffice to serve the market demand. When a firm can achieve a unit product at less cost, the product can be sold at the cheaper price. When a firm sells a product for cheaper price, the products will be sold soon. Other firms cannot compete with this price because they will run under a loss. So, the smallest firms will move out of the competition and only one firm can survive in the industry by producing more.