The long-run average-total-cost curve is U-shaped because:
A)a firm initially experiences economies of scale and then diseconomies of scale.
B)the law of diminishing returns to a factor sets in beyond a certain level of output.
C)a firm initially experiences diseconomies of scale and then economies of scale.
D)division of labor keeps labor productivity constant irrespective of expansion or contraction in production.
E)efficiency of capital increases over a period of time.

Question

Quizplus · Accepted Answer

The long-run average-total-cost curve is U-shaped because a firm experiences economies of scale at low levels of output, which leads to a decrease in average cost. However, beyond a certain point, the firm experiences diseconomies of scale due to factors such as increasing managerial difficulties, coordination problems, and decreasing returns to scale. As a result, average cost increases as output increases, leading to a U-shaped long-run average-total-cost curve.

The Long-Run Average-Total-Cost Curve Is U-Shaped Because