1.
If all firms, existing and potential new entrants, face decreasing industry costs in the long run
under perfect competition, the industry supply curve will:
Necessarily be upward sloping
Slope downwards if there are external diseconomies of scale
Slope upwards if there are internal economies of scale
Only be horizontal if there are constant external costs with respect to industry size
Slope downwards if there are external economies of scale
Solution
External economies of scale imply the lowering of costs in the long run due to external factors.
Perfect competition always charges the price equal to its marginal costs, thus, since the marginal
costs are falling due to external economies of scale, the supply curve will be downward sloping.
Hence, the correct option is (e) Slope downwards if there are external economies of scale .