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.

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

Equal to average cost.

Less than the average cost.

Greater than the average cost.

Falling.

✅ Correct Option: 3

Option 1 -> If MC equals AC, the average cost would be at its minimum point (neither rising nor falling).

Option 2 -> If MC is less than AC, each additional unit costs less than the average, pulling the average down, so AC would be falling.

Option 3 -> If MC is greater than AC, each additional unit costs more than the average, pulling the average up, so AC would be rising.

Option 4 -> MC can be rising, falling, or constant when AC is rising; the direction of MC doesn't determine whether AC rises.

Hence, Option 3: Greater than the average cost -> When average cost is rising, the marginal cost must be greater than the average cost. This is a fundamental relationship in cost theory: the marginal value pulls the average in its direction. When you add units that cost more than the current average (MC > AC), the average increases. Conversely, when MC < AC, the average decreases. The two curves intersect at the minimum point of AC where MC = AC. -> correct

Question 41

The equation of long-run marginal cost.

Question 42

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

Question 43

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

Question 45

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

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

Solution

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