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

Answer 1

Answer:

In this situation

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.

The option that is based on information is:

E) It can produce and supply flights at a lower cost per unit than if there were many smaller firms

Explanation:

The reason behind this is that thanks to the start-up costs being mitigated, the company can compete in the market at very low prices. This is the classic example of a company that has developed very well in the industry and uses the advantage of the establishment to gain more consumers. It doesn't matter if the margin is smaller than its rivals, while the amount of sales is big enough to achieve a good net profit.