Question

A firm in a constant cost industry expands it's production _______.

• A. at the same cost of production
• B. with increased production cost
• C. with reduced production cost
• D. none of the above

Answer 1

The correct option is A at the same cost of production

When a industry expands and reaches its optimum size, firms in it have already experienced external economies of scale which may have included easier access to the labour market and more negotiating power to deal with suppliers and receive preferential trade agreements. As a result, average cost is likely to fall to its optimum level and stays constant as long as the industry is at its optimum size. Thus the firms enjoy the same cost of production by slightly increasing production but still remaining on the minimum efficiency frontier.