The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve?
A)It would make it upward-sloping.
B)It would make it downward-sloping.
C)It would give it an inverse U shape.
D)It would give it a U shape.
E)It would make it horizontal.

Question

Quizplus · Accepted Answer

The existence of both economies of scale (which cause the average cost to decrease as output increases) and diseconomies of scale (which cause the average cost to increase as output increases beyond a certain point) would give the long-run average cost (LRAC) curve a U shape. Initially, as production increases, economies of scale lead to a decrease in average costs, creating the downward-sloping part of the U. Eventually, diseconomies of scale set in, leading to an increase in average costs as production continues to increase, creating the upward-sloping part of the U.

The Existence of Both Economies of Scale and Diseconomies of Scale