Question

If a firm’s production function exhibits constant returns to scale, its short-run average cost curve must be horizontal. True or False

Answer 1

Answer :- The statement given is false

Reason :

If a firm’s production function exhibits constant returns to scale, the long run average cost curve will be horizontal.

For a constant returns to scale production function, both average and marginal costs are constant.

When a firm is experiencing increasing returns to scale the average cost fall as output increases. Then the average cost curve will be downward sloping. If the production function exhibits constant returns to scale, the average cost will be the same for all output level. Thus the average cost curve will be a horizontal.

Again when there is decreasing returns to scale the average cost will be increasing with increasing output level.

All these returns together gives the shape of an envelope to the longrun average cost curve.