Question

Question 3:

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. 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

It is given that the long run average cost curves of most banks in the US is flat. Let us examine a economies of scale curve and see where that happens.

The flat part happens in the middle. It happens when all the economies of scale have been achieved. Any further increase in output from where will cause diseconomies of scale- a rise in unit cost!

So, if the government merges the banks, it is likely that the long run costs would actually increase.