Micro

Production & Costs

Medium

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Long Run Costs

In the long run, all inputs are variable. There are no fixed costs. The total cost and the total variable cost therefore, coincide in the long run. Long run marginal cost is the change in total cost per unit of change in output. Increasing returns to scale implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion. Decreasing returns to scale implies that if we want to increase the output by a certain proportion, inputs need to be increased by more than that proportion. Constant returns to scale implies a proportional increase in inputs resulting in a proportional increase in output. So the average cost remains constant as long as CRS operates. The LRAC curve is a ‘U’-shaped curve. Its downward sloping part corresponds to IRS and upward rising part corresponds to DRS. At the minimum point of the LRAC curve, CRS is observed. For the first unit of output, both LRMC and LRAC are the same. Then, as output increases, LRAC initially falls, and then, after a certain point, it rises. As long as average cost is falling, marginal cost must be less than the average cost. When the average cost is rising, marginal cost must be greater than the average cost. LRMC cuts the LRAC curve from below at the minimum point of the LRAC.

As long as decreasing returns to scale operates, as the firm increases output, the average cost must be ................

Rising

Falling

Constant

Equal to output

✅ Correct Option: 1

Option 1 -> Under decreasing returns to scale, doubling inputs leads to less than double the output, causing average cost to rise.

Option 2 -> Falling average cost occurs with increasing returns to scale, not decreasing returns.

Option 3 -> Constant average cost occurs with constant returns to scale, not decreasing returns.

Option 4 -> Average cost cannot be equal to output as they are measured in different units.

Hence, Option 1: Rising -> When decreasing returns to scale operate, proportional increases in all inputs result in less than proportional increases in output. For example, if all inputs are doubled, output increases by less than double. This means that to achieve a given increase in output, the firm must increase inputs by a larger proportion, leading to higher total costs per unit of output. Therefore, average cost (total cost divided by output) must be rising as the firm expands production under decreasing returns to scale. -> correct

Question 41

The equation of long-run marginal cost.

Question 43

The optimum output will be when the relationship between LRMC and LRAC.

Question 44

in the long run when the average cost is rising, marginal cost must be.

Question 45

The shape of the long-run average cost curve and long-run marginal cost curve.

As long as decreasing returns to scale operates, as the firm increases output, the average cost must be ................

Solution

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CUET Economics Past Year Questions (Topic-Wise)