A LRAC curve is U- shaped if:
A)input prices fall at low output levels and rise at higher levels.
B)factors of production become more productive as output expands.
C)decreasing returns to scale follow increasing returns to scale.
D)the production function is homothetic.

Question

Quizplus · Accepted Answer

The U-shape of the Long-Run Average Cost (LRAC) curve is attributed to economies of scale (increasing returns to scale) followed by diseconomies of scale (decreasing returns to scale). Initially, as production increases, the firm benefits from economies of scale, leading to a decrease in average costs. However, beyond a certain point, the firm experiences diseconomies of scale, where increasing production further leads to an increase in average costs, thus giving the LRAC curve its U-shape.

A LRAC Curve Is U- Shaped If