Micro

Production & Costs

Medium

Comprehension:

Shapes of the Long Run Cost Curves

It is argued that in a typical firm IRS is observed at the initial level of production. This is then followed by the CRS and then by the DRS. Long curve 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 curve cuts the LRAC curve from below at the minimum point of the LRAC.

As long as average cost is falling

Marginal cost > Average cost

Marginal cost < Average cost

Marginal cost = Average cost

Marginal cost = Total cost

✅ Correct Option: 2

Option 1: Marginal cost > Average cost -> This would cause average cost to rise, not fall.

Option 2: Marginal cost < Average cost -> This causes average cost to fall.

Option 3: Marginal cost = Average cost -> This occurs at the minimum point of average cost where it is neither rising nor falling.

Option 4: Marginal cost = Total cost -> This is not a standard economic relationship and doesn't relate to falling average cost.

Hence, Option 2: Marginal cost < Average cost -> When the cost of producing an additional unit (marginal cost) is less than the average cost per unit, it pulls the average down. This is similar to how adding a test score below your current average reduces your overall average. The marginal cost curve intersects the average cost curve at the minimum point of AC; before this point (when AC is falling), MC < AC. -> correct

Question 42

In the long run marginal cost curve shape is ..........

Question 43

When the average cost is rising, then.

Question 44

At the final level of production, a typical firm observed.

Question 45

LRMC cuts the LRAC curve from below at the point where.

As long as average cost is falling

Solution

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