Long-run average total costs curves are often U-shaped:
A: For the same reasons that average total cost curces are often U-shaped.
B: Because of constant returns to scales.
C: Because of increasing coordination problems at low levels of production and increasing specailization of workers at high levels of production
D: Because of increasing specialization of workers at low levels of production and increasing coordination problems at high levels of production.
I know B is not the answer. C and D don't seem to be right either. I picked A.
A doesnt make sense, and, as you surmised, B and C are incorrect. Go with D. At low levels, increase specialization can improve productivity and thus lower costs. However, at higher levels of output, coordination becomes a major issue, and average productivity falls. (Other reasons too can also explain the U shape).
The correct answer is D: Because of increasing specialization of workers at low levels of production and increasing coordination problems at high levels of production.
To understand why long-run average total cost (LRATC) curves are often U-shaped, it is helpful to first understand what average total cost (ATC) curves represent. ATC is the total cost per unit of output. When plotted on a graph, ATC curves often exhibit U-shaped behavior.
In the short run, firms are constrained by fixed factors of production, such as capital. This leads to diminishing marginal returns, where each additional unit of input yields progressively smaller increases in output. Initially, as production increases, the extra output gained from each additional worker or unit of capital leads to decreasing average total cost (ATC) curves. This is the downward-sloping part of the U-shaped curve.
However, in the long run, firms are no longer constrained by fixed factors of production. They can adjust their inputs, including capital, labor, and technology, to optimize their production process. At low levels of production, firms may face coordination problems. These problems arise due to a lack of specialization and inefficiencies in coordinating production activities. As a result, average total cost increases as the firm struggles to coordinate and utilize its resources efficiently.
On the other hand, as production expands and firms achieve higher levels of output, they can benefit from increasing specialization of workers. Specialization allows workers to become more efficient in their specific tasks, leading to improved productivity and lower average total cost. This specialization and efficiency gains result in the downward-sloping part of the U-shaped curve at higher levels of production.
Therefore, the correct answer is D: Because of increasing specialization of workers at low levels of production and increasing coordination problems at high levels of production.