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Question
What do the long run marginal cost and the average cost curves look like?
Solution
The long run marginal cost (LMC) and long run average cost (LAC) are U shaped curves. The reason behind them being U-shaped is due to the law of returns to scale. It is argued that a firm generally experiences IRS during the initial period of production followed by CRS, and lastly by DRS. Consequently, both LAC and LMC are U-shaped curves. Due to IRS, as the output increases, LAC falls due to economies of scale. Then falling LAC experiences CRS at Q1 level of output which is also called the optimum capacity. Beyond Q1 level of output, the firm experiences diseconomies of scale and if the firm continues to produce beyond Q1 level, the cost of production will rise.
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RELATED QUESTIONS
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L |
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