Which of the following does a decreasing-cost industry experience as output expands?

• A. Higher average costs due to diseconomies of scale
• B. No change in costs as industry output increases
• C. Constant average costs regardless of output level
• D. Lower average costs due to external economies of scale

Answer: (D)

Verified step by step guidance

1. Understand the concept of a decreasing-cost industry: This refers to an industry where the average cost of production decreases as the total output of the industry expands.
2. Recall the difference between internal and external economies of scale: Internal economies of scale occur within a firm, while external economies of scale occur due to factors outside the firm but within the industry.
3. Recognize that in a decreasing-cost industry, external economies of scale are present, meaning that as the industry grows, factors such as improved infrastructure, better supplier networks, or technological advancements reduce costs for all firms.
4. Analyze the options: Higher average costs indicate diseconomies of scale, which is the opposite of a decreasing-cost industry; no change or constant average costs imply a constant-cost industry, not a decreasing-cost one.
5. Conclude that the correct characteristic of a decreasing-cost industry is lower average costs due to external economies of scale as output expands.