The long-run average total cost curve owes its U-shaped structure to the economies and diseconomies of scale.

Question

Quizplus · Accepted Answer

The U-shaped long-run average total cost curve shows the relationship between the average total cost and the output level. The cost initially decreases due to economies of scale, which are the cost advantages that come with an increase in production. However, as the output continues to increase, the costs may eventually increase due to diseconomies of scale, which are the disadvantages associated with an increase in the scale of production. Therefore, the U-shaped curve is a result of both economies and diseconomies of scale.

The Long-Run Average Total Cost Curve Owes Its U-Shaped Structure