If the generic production function Q=f(K,L) displays increasing returns to scale, the value of K is fixed in the short-run, and the prices of all inputs are held constant, then:
A) the Short-Run Average Cost curve must be strictly decreasing.
B) the Long-Run Average Cost curve must be strictly decreasing .
C) the Short-Run and the Long-Run Average Cost curves will coincide.
D) the Long-Run Average Cost curve must be strictly increasing .

Question

Quizplus · Accepted Answer

Increasing returns to scale imply that doubling both inputs will more than double output. This allows for the possibility of lower costs per unit of output when all inputs can be adjusted in the long-run. Therefore, the Long-Run Average Cost curve must be decreasing. The Short-Run Average Cost curve is not specified by the information given and could take on any shape depending on the specific costs of inputs in the short-run.

If the Generic Production Function Q=f(K,L) Displays Increasing Returns to Scale