Question

Draw a diagram to show total costs, average costs and marginal costs in the case of decreasing returns to scale. Explain the shape of each curve.

Answer 1

Ans. Diseconomies of scales occur in long run when increase in production leads to increase in average cost. Thus, in this portion longrun average cost curve is upward sloping and marginal cost is to its left and the total cost is the portion of total cost curve which is increasing at increasing rate.

LRTC - long run total cost

LRMC - long run marginal cost

LRAC - long run average cost

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