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The U-shaped of the long run average cost curve is explained by A. Law of variable proportion B. Law of diminishing returns C. Law of diminishing marginal utility D. Return to scale
Economics
ScanSolve AI Answer
Answer
D
Step-by-step solution
3 stepsIdentify the cause of the U-shaped long-run average cost (LRAC) curve.
In the long run, all inputs are variable, so cost curves reflect returns to scale (how output changes when all inputs scale proportionally).
Explain returns to scale and their effect on LRAC.
- Increasing returns to scale: output rises more than proportionally → economies of scale → LRAC decreases (downward slope).
- Constant returns to scale: output rises proportionally → LRAC constant (flat bottom).
- Decreasing returns to scale: output rises less than proportionally → diseconomies of scale → LRAC increases (upward slope).
This produces the U-shape of LRAC.
Rule out other options.
- A and B (Law of variable proportion / diminishing returns): Short-run concepts (one input fixed), explain U-shaped short-run AC curve, not long-run.
- C (Law of diminishing marginal utility): Applies to consumer utility, not firm production costs.
The U-shaped long-run average cost curve is explained by return to scale.
D
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