Decreasing and increasing returns to scale account for the shape of the:
A)short-run average total cost curve.
B)short-run average variable cost curve.
C)long-run average total cost curve.
D)marginal cost curve in both the short run and the long run.

Question

Quizplus · Accepted Answer

Decreasing and increasing returns to scale refer to the changes in output as a result of proportional changes in inputs in the long-run. The long-run average total cost curve is shaped by these returns to scale. When there are decreasing returns to scale, the average total cost increases as the firm expands its output, leading to an upward-sloping portion of the curve. When there are increasing returns to scale, the average total cost decreases as the firm expands its output, leading to a downward-sloping portion of the curve. Therefore, option C is the correct answer.

Decreasing and Increasing Returns to Scale Account for the Shape