(5 points) A constant cost industry is one in which the LRMC for the industry is constant. An increasing cost industry is one in which the LRMC for the industry is increasing. Which is more likely to be a constant cost industry: bagel restaurants or cranberry production? Explain. What does this imply about the slopes of the long-run supply curves in these industries?
In this article, the bagel industry closely resembles a constant cost industry. A constant cost industry is a perfectly competitive industry that gives a horizontal long run industry supply curve. The slope for this supply curve is infinity. The expansion of the industry causes no change in the production cost. The entry of new firms, driven by an increase in demand doesn’t affect the long run average cost curve which can be seen in the article and will be discussed later on. As a result, the minimum efficient scale does not change. This means that the marginal cost of producing another bagel is equal the average cost of producing that bagel. The primary reason for a constant cost industry is that the increase in demand has little impact on the production cost as new firms can easily enter the market and obtain resources at constant prices.
The bagel industry featured in the article shows a lot of similarities on who a constant cost industry work. First, the demand for bagel went up shifting the demand curve to the right. As a result, the prices and quantity sold went up as well. In the article, this happened around 1994-1996, the boom years of bagel, wherein sales were going up by 30% per year and economic profit was high. Then as expected, the boom in the bagel industry would prompt competition to set in as Bruegger’s Corp, Manhattan Bagel and other companies came into the picture since there is not much barrier to enter the bagel market. This would also make the supply curve shift to the right. The important thing here is how far the supply shifts to the right as more competition eats up...
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