Question

4.Why is the long‐run ATC also U‐shaped? Explain fully.

Use the personal opinion to answer，thanks.

Answer 1

The average total cost curve is an envelope curve which constitutes the different short-run aggregate total cost curves at different plant sizes. The reason behind the U shape of the ATC curve is as;

At the initial level of output due to increasing returns to scale there are decreasing costs and ATC slopes downwards.

At a certain point of output, there are constant returns to scale and for a proportionate increase in input, costs increase by the same proportion hence average cost curve is flatter

After the constant returns are saturated, input increase leads to more than proportionate increase in costs and establishes decreasing returns to scale. It is indicated by a rising ATC slope for larger scale of output.