Question

Explain the shape of the Long run average cost curve and comment on the shape of the modern day LAC.

Answer 1

Ans:- The economist usually believes that the LAC or Long Run Average Cost Curve is 'U' shaped because of return to scale. There are many reasons for the long run average cost curve are 'U' shaped.

In the starting of a business the firms enjoys lot of economies to scale at that time the LAC is downward sloping. But after certain period the factors attaining exhausted that cause growth in the cost of production. After certain period the long run average cost curve become constant (the firm faces many diseconomies to sale).After the diminishing returns to scale long run average cost curve moves upward. So the long run average cost curve 'U' shaped.