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.

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

Increasing returns to scale

Constant returns to scale

Decreasing returns to scale

Total production

✅ Correct Option: 3

Option 1: Increasing returns to scale -> Occurs in early stages when firms benefit from specialization and efficiency gains.

Option 2: Constant returns to scale -> Output increases proportionally with inputs, typically a transitional phase.

Option 3: Decreasing returns to scale -> Occurs at mature/final production levels due to coordination difficulties and management inefficiencies.

Option 4: Total production -> Not a type of returns to scale, just a measure of output.

Hence, Option 3: Decreasing returns to scale -> At the final or mature level of production, firms typically experience decreasing returns to scale. This happens because as the firm grows very large, it faces management complexities, coordination problems, bureaucratic inefficiencies, and difficulty in maintaining optimal supervision. The marginal productivity of additional inputs diminishes, and the firm cannot replicate the same efficiency gains it experienced during earlier expansion phases. This is a natural progression in the production function where initial increasing returns eventually give way to decreasing returns. -> correct

Question 41

As long as average cost is falling

Question 42

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

Question 43

When the average cost is rising, then.

Question 45

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

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

Solution

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