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When firms grow larger, they sometimes acquire more market power, meaning that they have a greater ability to negotiate lower prices with their suppliers
When firms grow larger, they sometimes acquire more market power, meaning that they have a greater ability to negotiate lower prices with their suppliers. This ability to negotiate lower prices with their suppliers leads to
A. increasing marginal returns.
B. diminishing marginal returns.
C. economies of scale.
D. diseconomies of scale.
E. constant returns to scale.
Expert Solution
- The correct answer is C) economies of scale.
The ability of a firm to negotiate for lower prices will result in reduced prices of inputs and thus reduced production costs. One can conclude that the higher the market power, the higher will be the ability to negotiate prices, and therefore lower will be the costs of production. Reduced costs will facilitate the production of more goods resulting in economies of scale.
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