The shape of the long-run average cost (LRAC)curve reflects _____
A)market demand.
B)economies and diseconomies of scale.
C)increasing and diminishing marginal returns.
D)the productivity of fixed inputs.
E)the law of diminishing returns.

Question

Quizplus · Accepted Answer

The LRAC curve reflects economies and diseconomies of scale, which are the changes in average costs as the level of output changes in the long run. The LRAC curve reflects the minimum average cost of producing each level of output and is U-shaped due to economies of scale initially being greater than diseconomies of scale, and then as the firm grows too large, diseconomies of scale begin to outweigh economies of scale. The LRAC curve does not reflect market demand or the productivity of fixed inputs. Although there may be a relationship between increasing and diminishing marginal returns and economies of scale, the LRAC curve reflects the overall impact of both, not just one or the other. The law of diminishing returns may impact the cost structure of the firm in the short run, but in the long run, it is the economies and diseconomies of scale that drive changes in the LRAC curve.

The Shape of the Long-Run Average Cost (LRAC)curve Reflects _____