Management Notes

# Management Notes

Reference Notes for Management

# Long Run Average Cost Curve (LRAC Curve) – Cost Curves | Theories of Production and Cost

## Long Run Average Cost Curve (LRAC Curve)

### Long Run Average Cost Curve Meaning

Long Run Average Cost Curve (LRAC) is one of the types of  Cost Curves which depicts the cost per unit  of output in the long run. The behavioral assumption underlying this curve is that the producer will select the combination of inputs that will produce a given output at the lowest possible cost. The shape of typical LRAC curve is U-shaped reflecting various aspects like:

• Negatively Sloped indicates = Increasing Returns of Scale
• Horizontally Sloped indicates = Constant Returns to Scale
• Positively Sloped indicates = Decreasing Returns due to increase in Factor Prices

From the above graphical representation of LRAC,

• All points on the Line of LRAC = Lease Cost Factors Combinations
• All points above LRAC = Attainable but Unwise factors of Production
• All points below LRAC = Unattainable factors of Production

### Viner Error

The LRAC curve is created as an envelope of an infinite number of short-run average total cost curves, each based on a particular fixed level of capital usage. Contrary to the assertion of Canadian economist Jacob Viner, the envelope is not created by the minimum point of each short-run average cost curve. This mistake is recognized as Viner’s error.

## Long Run Average Cost Curve (LRAC Curve) MCQs

### Which of the following is true about the long-run average cost curve?

a) The LRAC curve maintains economies of scale regardless of production quantity.
b) The LRAC is comprised of a series of short-run average cost curves.
c) The LRAC curve is comprised of the highest points of a series of short-run average cost curves.
d) The LRAC is equal to or lies below any short-run cost curve due to fixed costs.

The Correct Answer for the given question is option b) The LRAC is comprised of a series of short-run average cost curves.

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### The long-run average cost curve will be upward sloping when the firm is experiencing:

a. economies of scale.
b. diseconomies of scale.
c. constant returns to scale.
d. diminishing returns.
e. efficiencies in production

The Correct Answer for the given question is option b. diseconomies of scale.

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### The long-run average total cost curve is tangent to an infinite number of:

a. short-run total cost curves.
b. short-run marginal cost curves.
c. short-run average variable cost curves.
d. short-run average total cost curves.
e. short-run marginal product curves.

The Correct Answer for the given question is option d. short-run average total cost curves.

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### Diseconomies of scale exist over the range of output for which the long-run average cost curve is:

a) falling.
b) constant.
c) rising.
d) subject to diminishing returns.

The Correct Answer for the given question is option c) rising.

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### When the long run average cost (lrac) curve is horizontal, it implies there are ________.

a) there are diseconomies of scale
b) economies of scale
c) constant returns to scale

The Correct Answer for the given question is option c) constant returns to scale

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### The downward-sloping portion of the long-run average cost curve is a result of:

a) economies of scale.
b) diseconomies of scale.
c) diminishing returns.
d) the existence of fixed resources.

The Correct Answer for the given question is option a) economies of scale.

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### If production displays economies of scale, the long-run average cost curve is

a) upward sloping.
b) downward sloping
c) below the long-run marginal cost curve.
d) above the short-run average total cost curve.