The situation in which the long-run average cost curve exhibits economies of scale over the entire range of output is called a "natural monopoly
" Explain why, in the case of a natural monopoly, it would be cost efficient to have a single firm serve the entire market.
In the case of a natural monopoly, as a single firm expands its scale of operation, the short-run average cost curve shifts down and to the right. So long as it is big enough, a single firm could serve the entire market. By having a single firm serve the entire market, short-run (and long-run) average costs would be lower than they would if two or more firms served the same market. In the latter case, each firm would be operating a smaller scale plant than one big firm because each firm only serves part of the market. When the long-run average cost curve exhibits economies of scale over the entire range of output, moving to the left along the LRAC curve causes short-run costs to increase.
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An adverse supply shock would cause the FE line to
A) shift to the right. B) shift to the left. C) remain unchanged. D) remain unchanged if the shock is temporary; shift to the right if the shock is permanent.
Suppose that firms are paying their "efficiency wage" rate and AD shifts leftward. Firms that lower wages and maintain production would
A) achieve lower profits since worker efficiency would fall and total wages paid increase. B) achieve lower profits since worker efficiency would fall and wages per unit of output increase. C) achieve higher profits. D) achieve lower per unit wage costs.