Suppose that an industry has high fixed costs to enter but o

Suppose that an industry has high fixed costs to enter but, other than that, is competitive.

A. What will be the effect of the high fixed costs to the number of firms in the industry? To the firm size? Is marginal cost higher or lower for a firm with high fixed costs? Is price higher or lower? Is quantity produced higher or lower?
B. Give an example of a firm with a high fixed cost and a firm with a low fixed cost. Give an example of a firm with low variable costs and a firm with high variable costs.

Solution

A.

Number of firms will be decreased if there is high fixed cost to enter.

Firm size will be increased in order to recover the fixed cost. An individual firm should produce the maximum number of units to recover the fixed cost and to earn profit.

Marginal cost is lower for a firm with high fixed cost, since one cost is compensated with other.

The price is lower, since the firm has to recover the high fixed cost.

There must be higher quantity to be produced for recovering the fixed cost.