If output is increased in the long run, then in the presence of internal economies of scale the number of firms will ________, and in the presence of constant external returns to scale the number of firms will ________.
A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease

Question

Quizplus · Accepted Answer

In the presence of internal economies of scale, as output increases in the long run, the average cost per unit of output decreases, making it more profitable for a single firm to increase its output. This leads to an increase in the size of the firms, but not necessarily the number of firms. Therefore, the number of firms will remain constant. In the presence of constant external returns to scale, an increase in output does not affect the average cost per unit of output, and firms can continue to operate at their most efficient scale. Thus, the number of firms will increase to respond to the increased demand for the product.

If Output Is Increased in the Long Run, Then in the Presence