Wuthering Flights is an airline that sells seats for domestic air travel in the nation of Hamsterville. This firm experiences decreasing the average cost for the entire range of its demand curve due to very high start-up costs associated with running an airline.

Which of the following must be true based on this information?

Choose 1 answer:
(A) It produces a quantity that is both productively efficient and allocatively efficient.
(B) There is no deadweight loss.
(C) It is productively efficient for the government to break up this monopoly.
D. It can produce and supply flights at a lower cost per unit than if there were many smaller firms.
(E) It is possible to eliminate deadweight loss by taxing this firm.

Question

Wuthering Flights is an airline that sells seats for domestic air travel in the nation of Hamsterville. This firm experiences decreasing the average cost for the entire range of its demand curve due to very high start-up costs associated with running an airline.

Which of the following must be true based on this information?

Choose 1 answer:
(A) It produces a quantity that is both productively efficient and allocatively efficient.
(B) There is no deadweight loss.
(C) It is productively efficient for the government to break up this monopoly.
D. It can produce and supply flights at a lower cost per unit than if there were many smaller firms.
(E) It is possible to eliminate deadweight loss by taxing this firm.

Accepted Answer

∻Solution∻ ‖ a ⋮ Decreasing Average Costs: When a firm experiences decreasing average costs, it means that as it produces more, the cost per unit decreases. This is often due to high fixed costs, such as start-up costs, which are spread over a larger number of units as production increases. ‖ ‖ b ⋮ Natural Monopoly: A firm like Wuthering Flights, with high start-up costs and decreasing average costs over the entire range of its demand curve, is likely a natural monopoly. This is because one firm can produce the total output at a lower cost than if there were multiple firms in the industry. ‖ ‖ c ⋮ Option Analysis: - (A) Productive efficiency occurs when a firm operates at the lowest point on its average cost curve, and allocative efficiency occurs when price equals marginal cost. The statement does not provide enough information to conclude this. - (B) Deadweight loss is typically present in monopolies because they set price above marginal cost, leading to allocative inefficiency. - (C) Whether it is productively efficient for the government to break up a monopoly depends on the specifics of the market and cannot be determined from the statement given. - (D) Given the decreasing average costs, it is likely that Wuthering Flights can produce at a lower cost per unit than if there were many smaller firms. - (E) Taxing a monopoly does not necessarily eliminate deadweight loss; it depends on how the tax affects the firm's pricing and output decisions. ‖ ∻Answer∻ ⚹ (D) It can produce and supply flights at a lower cost per unit than if there were many smaller firms. ⚹ ∻Key Concept∻ ⚹ Natural Monopoly and Decreasing Average Costs ⚹ ∻Explanation∻ ⚹ A natural monopoly exists when a single firm can supply a good or service to an entire market at a lower cost than two or more firms, often due to high fixed costs and economies of scale.◊What impact would Wuthering Flights' decreasing average costs have on the market structure in Hamsterville?⍭ Generate me a similar question◊⚹

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