Suppose a firm's production technology exhibits constant returns to scale. The firm's long-run average cost curve will:
A)be U-shaped
B)exhibit economies of scale.
C)exhibit diseconomies of scale.
D)be a horizontal straight line.

Question

Quizplus · Accepted Answer

If a firm's production technology exhibits constant returns to scale, it means that increasing all inputs by the same proportion will result in the same proportionate increase in output. As a result, the firm's long-run average cost curve will be a horizontal straight line because the average cost per unit of output will remain constant as the firm increases its output level. A constant returns to scale production technology means that doubling the inputs will result in a proportional increase in outputs. This implies that the average cost of producing each unit of output is constant, regardless of the level of output. Therefore, the long-run average cost curve will be a horizontal straight line.

Suppose a Firm's Production Technology Exhibits Constant Returns to Scale