Question

There are over 5,000 banks in the United States—more than 10 times more per person than in other industrialized countries. A recent study suggests that the long-run average cost curve for an individual bank is relatively flat. If Congress took steps to consolidate banks (merge some of the banks), thereby reducing the total number to 2,500, what would you expect to happen to average costs within the banking industry? Please explain.

Answer 1

Ans- With a flat long run average cost curve,there would be neither economies nor diseconomies of scale in banking service. 2500 banks would each have to double their output. However corresponding average cost in every individual bank and the total cost of the bank industry would remain unchanged although Congress reduces 2500 banks. The long run average cost curve may maintain relatively flat if the scale of the other banks is greater than minimum efficient scale. Or the cost will increase which decrease the section of the long run average cost curve.