Question

Senator Hubris wants to pass a law that would require all monopolistically competitive firms to operate at their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically competitive firms would:

A) Expand production.
B) Increase advertising costs.
C) Operate at higher than optimal scale.
D) Operate at their optimal scale.

Answer 1

If the law were to pass and be enforced, we would expect monopolistically competitive firms to operate at their optimal scale. (option C)

Step-by-step explanation:

If Senator Hubris wants to pass a law requiring monopolistically competitive firms to operate at their efficient scale, we would expect these firms to operate at their optimal scale. Operating at the optimal scale means that the firms are producing the quantity of goods that minimizes their average cost per unit.

Operating at an efficient scale allows firms to take advantage of economies of scale, which refers to the cost advantages that result from increasing the level of production. This enables firms to lower their average cost per unit, leading to a more efficient use of resources and potentially lower prices for consumers.

However, the provided information suggests that forcing monopolistically competitive firms to operate at their efficient scale would result in higher average costs for each firm. This could lead to the firms having to raise their prices to cover the increased costs, which goes against the objective of the law.