In which of the following situations would consideration of the minimum efficient scale of operation suggest that the market should be served by a single firm to minimize production costs?
A)When the LRAC curve slopes downward over the relevant range of output.
B)When the LRAC curve hits its minimum point at a relatively low level of output and then increases and the demand for output is quite large.
C)When the LRAC curve hits its minimum point at a relatively low level of output but then remains constant as the scale of operation is increased and the demand for output is quite large.
D)When the LRAC curve initially increases and then decreases beyond some point.

Question

Quizplus · Accepted Answer

When the Long-Run Average Cost (LRAC) curve slopes downward over the relevant range of output, it indicates economies of scale. This means that as production increases, the average cost of producing each unit decreases. In such a scenario, a single firm can produce the total market demand at a lower cost than multiple firms, suggesting a natural monopoly situation where one firm is most efficient in serving the entire market.

In Which of the Following Situations Would Consideration of the Minimum