What do the long run marginal cost and the average cost curves look like?

Question

Philoid · Accepted Answer

The long run marginal cost (LMC) curve and long range average cost (LAC) curves are U shaped curves but flatter than short run U shape, because of the law of returns to scale.

The important factors determining the shape of LAC and LMC are that whether there is increasing, constant, or decreasing returns to scale.

• At constant returns to scale AC will be same for all levels of output

• At increasing returns to scale the average cost with fall will fall with every unit of output

• At decreasing returns to scale the average cost will increase with every unit of output