if production displays economies of scale, the long run average cost curve is:
a) upward sloping
b) above the short run average total cost curve
C0 below the long run marginal cost curve
d) downward sloping
When it comes to determining the shape of the long-run average cost curve, one needs to understand the concept of economies of scale first. Economies of scale refers to the cost advantages that a firm can achieve by increasing its level of production. As production increases, the average cost per unit of output tends to decrease.
Now, let's analyze the options given:
a) Upward sloping: An upward-sloping long run average cost curve indicates diseconomies of scale. This means that as the level of production increases, the average cost per unit of output also increases. However, in the question, it is stated that production displays economies of scale, so we can eliminate this option.
b) Above the short run average total cost curve: This statement does not directly relate to economies of scale. The short-run average total cost curve represents the average cost per unit of output in the short run, whereas economies of scale refer to the relationship between the level of production and the average cost per unit of output in the long run. Hence, we can eliminate this option as well.
c) Below the long run marginal cost curve: The long run marginal cost curve represents the change in the total cost when producing an additional unit of output in the long run. Economies of scale indicate that the average cost per unit of output decreases as production increases. In this case, the average cost per unit of output will be below the long run marginal cost curve, allowing the firm to realize cost savings. Thus, this option is correct.
d) Downward sloping: A downward-sloping long run average cost curve is an indication of economies of scale. As production increases, the average cost per unit of output decreases, reflecting cost efficiencies achieved through economies of scale. Therefore, this option is also consistent with the concept of economies of scale.
In conclusion, the correct answer is:
c) Below the long run marginal cost curve
d) Downward sloping