The correct answer is: C. neither surpluses nor losses.
In a decreasing cost industry, the long-run average cost curve slopes downward. This means that as a firm produces more output, its average cost of production decreases. In this case, if the firm were to charge a price equal to marginal cost, it would not make a profit or a loss. This is because the marginal cost curve intersects the average cost curve at the minimum point of the average cost curve.
Here is a diagram that illustrates this concept:
[Diagram of a decreasing cost industry with the marginal cost curve intersecting the average cost curve at the minimum point of the average cost curve]
As you can see, the marginal cost curve intersects the average cost curve at the minimum point of the average cost curve. This means that if the firm were to charge a price equal to marginal cost, it would not make a profit or a loss.
Here is a brief explanation of each option:
- Surpluses: A surplus occurs when the price of a good or service is greater than the equilibrium price. This means that there is more demand for the good or service than there is supply. In a decreasing cost industry, a surplus would occur if the firm were to charge a price that is greater than marginal cost. This is because the marginal cost curve is below the average cost curve at all points above the minimum point of the average cost curve.
- Losses needing subsidies: A loss occurs when the price of a good or service is less than the equilibrium price. This means that there is more supply of the good or service than there is demand. In a decreasing cost industry, a loss would occur if the firm were to charge a price that is less than marginal cost. This is because the marginal cost curve is above the average cost curve at all points below the minimum point of the average cost curve.
- Neither surpluses nor losses: As explained above, in a decreasing cost industry, the firm would not make a profit or a loss if it charged a price equal to marginal cost.
- A decline in output: A decline in output would occur if the firm were to charge a price that is greater than marginal cost. This is because the firm would be producing at a point where the marginal cost curve is above the average cost curve. This would mean that the firm’s average cost of production would be higher than the price it is charging, and it would make a loss.