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Unformatted text preview: Econ 274 Fall 2011 Problem Set 1 Glandon Due: Friday, September 9 by 5:00 PM 1. Suppose that production of a particular good uses a technology that results in a large fixed cost and constant marginal cost for all levels of production. Would you expect to see many or few firms in this industry? Explain. Few firms, maybe only one. The more a firm sells, the lower its average cost. There is no minimum efficient scale so the largest firm can charge a lower price than all others and remain profitable. This would tend to drive out firms operating at a smaller scale (1 point). 2. A researcher observes that a particular industry consists of many small firms. What are some reasonable conclusions you might draw about the behavior of cost in this industry? Explain. (2 points) Minimum efficient scale is small relative to the size of the market. Said differently, the minimum of average cost occurs at a quantity that is small compared to the total quantity sold in the market. Barriers to entry (eg fixed costs) are probably low as well. Barriers to entry (eg fixed costs) are probably low as well....
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This note was uploaded on 12/15/2011 for the course EES 108 taught by Professor Giligan during the Spring '11 term at Vanderbilt.
- Spring '11