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.

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

LRMC is at minimum

LRAC is at minimum

LRAC is at maximum

LRMC is at maximum

✅ Correct Option: 2

Option 1 -> LRMC intersects LRAC at LRAC's minimum, not LRMC's minimum.

Option 2 -> LRMC cuts LRAC from below at the minimum point of LRAC - this is the optimal production scale.

Option 3 -> LRAC does not have a maximum point in standard cost theory.

Option 4 -> The intersection occurs at LRAC's minimum, not LRMC's maximum.

Hence, Option 2: LRAC is at minimum -> The LRMC curve always intersects the LRAC curve at the minimum point of LRAC. Before this point, LRMC lies below LRAC (pulling the average down), and after this point, LRMC lies above LRAC (pulling the average up). This is why we say LRMC "cuts from below" at the minimum of LRAC. This intersection point represents the most efficient scale of production in the long run. -> 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 44

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

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

Solution

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