If a firm is experiencing constant returns to scale
A)long-run average total cost neither rises nor falls as production increases
B)average fixed cost is zero
C)the increase in average variable cost is exactly offset by a decrease in average fixed cost
D)the decrease in average variable cost is exactly offset by an increase in average fixed cost
E)long-run average total cost is zero.

Question

Quizplus · Accepted Answer

Constant returns to scale means that as production increases, inputs are increased in the same proportion resulting in a constant average cost. This means that long-run average total cost neither rises nor falls as production increases. Therefore, choice A is correct. Average fixed cost is not necessarily zero, so B is incorrect. C and D are also incorrect because the offset in changes in average cost does not necessarily have to be equal. Option E is impossible since a firm would not be able to cover any production costs if the long-run average total cost is zero.

If a Firm Is Experiencing Constant Returns to Scale