When returns to scale are decreasing, long run marginal cost is:
A)less than long run average cost.
B)negative.
C)equal to long run average cost.
D)greater than long run average cost.

Question

Quizplus · Accepted Answer

When returns to scale are decreasing, long run marginal cost is greater than long run average cost. This is because when the firm increases production and experiences decreasing returns to scale, it must start using less efficient production methods which increases its average cost. The additional cost incurred from using these less efficient methods is captured by the long run marginal cost. Therefore, long run marginal cost is greater than long run average cost.

When Returns to Scale Are Decreasing, Long Run Marginal Cost