Question

True or False? The U shape of the long-run ATC curve is the result of diminishing returns. Explain why.

Answer 1

False

There are no diminishing returns in long run becuase all inputs are variable in long run and diminishing returns occurs due to fixity of some inputs.

The shape of long run ATC is U shaped because economies, constant and diseconomies of scale.

ATC starts falling due to economies of scale because increase in inputs leads to higher increase in output.

ATC is constant due to constant returns. Increase in inputs leads to equal proportional increase in output.

ATC starts increasing due to diseconomies of scale. Increase in inputs leads to less increase in output.

This makes ATC U shaped in long run.