If a firm has a U-Shaped long-run average cost curve,
a.) its fixed cost rises as output rises.
b.) it must have increasing returns to scale at low levels or production and decreasing returns to scale at high levels of production.
C.) it must have increasing returns to each input at low levels of production and decreasing returns to each input at high levels of production.
D.) the firm can maximize its output by operating at the point of minimum long run average.
You have given four options which are are possisible implication of the U-shape average cost curve. Here, answer is option (c)
Bruh, it's not C. I know that. I got the question wrong on one of my tests. Do me a favor and DONT PUT DOWN C. My guess would have been B. Tell me if I am wrong
The correct answer is B.
The correct answer is:
c.) It must have increasing returns to each input at low levels of production and decreasing returns to each input at high levels of production.
A U-shaped long-run average cost curve implies that the firm experiences economies of scale at low levels of production, meaning that as output increases, the firm's average cost per unit decreases. This indicates that the firm has increasing returns to each input (such as labor and capital) at low levels of production.
However, at high levels of production, the firm experiences diseconomies of scale, meaning that as output continues to increase, the firm's average cost per unit starts to increase. This implies that the firm has decreasing returns to each input at high levels of production.
So, option c is the correct answer.
To understand why option (c) is the correct answer, let's discuss the different implications of a U-shaped long-run average cost curve.
A U-shaped long-run average cost curve suggests that the firm experiences economies of scale at low levels of production and diseconomies of scale at high levels of production. In other words, as the firm increases its output from low levels, it initially benefits from increasing returns to scale, which lead to lower average costs per unit. However, as it continues to increase production, it eventually faces diminishing returns to scale, resulting in higher average costs per unit.
Now, let's break down each option:
a.) "Its fixed cost rises as output rises": This statement is not necessarily true. Fixed costs are costs that do not change with the level of production. While U-shaped long-run average cost curves may be associated with changes in fixed costs due to changes in the firm's scale of operation, it is not a general implication of a U-shaped curve. Thus, this option is incorrect.
b.) "It must have increasing returns to scale at low levels of production and decreasing returns to scale at high levels of production": This statement accurately reflects the implications of a U-shaped long-run average cost curve. At low levels of production, the firm experiences economies of scale (increasing returns to scale), and at high levels of production, it faces diseconomies of scale (decreasing returns to scale). Therefore, this option is correct.
c.) "It must have increasing returns to each input at low levels of production and decreasing returns to each input at high levels of production": This statement is incorrect. While a U-shaped long-run average cost curve suggests changes in returns to scale, it does not necessarily imply changes in returns to each input. Therefore, this option is incorrect.
d.) "The firm can maximize its output by operating at the point of minimum long-run average": This statement is also incorrect. The point of minimum long-run average cost represents the minimum average cost per unit of output, not the maximum output. The firm's goal is typically to maximize profits, which is achieved by finding the level of output that maximizes the difference between total revenue and total cost, not by minimizing the average cost. Therefore, this option is incorrect.
In conclusion, the correct answer is option (b) - a firm with a U-shaped long-run average cost curve must have increasing returns to scale at low levels of production and decreasing returns to scale at high levels of production.