Suppose a firm experiences lower average costs whenever output increases in the long run. Then we would expect the firm to have
A) a U-shaped long-run average cost curve.
B) an L-shaped long-run average cost curve.
C) a long-run average cost curve that always decreases.
D) a minimum efficient scale relatively close to the origin.

Question

Quizplus · Accepted Answer

If a firm experiences lower average costs as output increases in the long run, then it must be benefiting from economies of scale. This means that as the firm grows, it is able to spread its fixed costs (e.g. rent, equipment) over a larger output, resulting in lower average costs. As the firm continues to grow, it may also benefit from other economies of scale such as increased purchasing power or specialization of labor. These benefits will lead to a long-run average cost curve that decreases over a large range of output. Therefore, option C - a long-run average cost curve that always decreases - is the best choice. Options A, B, and D do not accurately reflect the relationship between output and average costs for a firm experiencing economies of scale.

Suppose a Firm Experiences Lower Average Costs Whenever Output Increases