Discussion
The equilibrium in a market is incomplete with increasing returns to scale only in the case of
Answer: C
Under increasing returns to scale, average cost keeps falling as output rises, so a firm that takes price as given would want to expand without limit and no competitive equilibrium exists. That is why the equilibrium is incomplete with increasing returns only in perfect competition, option (C). Imperfectly competitive and monopolistic markets can reach equilibrium with a falling cost curve because the firm faces a falling demand curve and a limit to output. Hence (A), (B) and (D) are wrong. With increasing returns the firm would go on expanding as long as price exceeds its falling marginal cost, so there is no stable output.
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