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

Because the long run average cost curve is flat it indicates that there are constant returns to scale industry at the current level of industrial output. if there is a reduction in the number of firms there will be a reduction in the market quantity supplied. Decline in the industrial output means, the market will move up along the long run average total cost curve, leftwards. Because less output is produced now, cost per unit will increase. This happens as the market enters the declining portion of the long run average cost curve, suggesting that if production is increased cost can be reduced, and if production is reduced cost will be increased.