Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of...

Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of the long-run average cost curve and returns to scale.

Expert Solution

Answer : 1) In long run at first when output level increase then the average cost start to decrease continuously. And then at certain output level the average cost become minimum. After that output level the average cost start to increase continuously if output level increase. So, at first the long run average cost decrease and then it become minimum and then it start to increase. Hence the long run average cost curve is U-shaped.

2) The connection between long run average cost curve and returns to scale is following :

When long run average cost decrease then the firm face a situation of increasing returns to scale. This situation is also known as economies of scale.

When long run average cost is minimum then the firm's returns to scale is maximum. This situation is also known as minimum efficient scale.

When long run average cost start to increase then the firm face a situation of decreasing returns to scale. This situation is also known as diseconomies of scale.

Rahul Sunny answered 1 year ago

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Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of...

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