Question

A recent study indicates that the long-run average cost curve for cellular telecom companies is basically flat. What do you expect to happen to industry output and costs per subscriber if the number of cellular providers were reduced (assuming the costing finding is true)? Why?

Answer 1

Assuming that the information about the long-run average cost curve for cellular telecom companies is true and the LRAC curve is basically flat. LRAC is flat when there are constant returns and it implies that reduction or increase in the production has no effect on the per unit cost.  

We therefore expect the industry output to fall in the short run and costs per subscriber to rise in the short run but stay the same in the long run if the number of cellular providers were reduced. This is perhaps because the long run AC has nothing to do with the number of firms as long as it is a constant cost industry. In the short run there can be changes in the market equilibrium where price rises as firms are out. But evenutally the industry will return to the same long run cost and so the long run price.