When there are external economies of scale, an increase in the size of the market will
A) not affect the number of firms, but will lower the price per unit.
B) decrease the number of firms and lower the price per unit.
C) decrease the number of firms and raise the price per unit.
D) increase the number of firms and raise the price per unit.
E) increase the number of firms and lower the price per unit.

Question

Quizplus · Accepted Answer

When there are external economies of scale, the cost per unit decreases as the size of the market increases. This will attract new firms to enter the market, resulting in an increase in the number of firms. As a result of increased competition, the price per unit will decrease. Therefore, an increase in the size of the market will lead to an increase in the number of firms and a lower price per unit. Choice E is the only option that reflects this.

When There Are External Economies of Scale, an Increase in the Size