CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A firm's long-run average cost curve is U-shaped. The rising right-hand portion of this curve is best explained by which of the following?
The rising part of the long-run average cost curve reflects diseconomies of scale, such as managerial and coordination problems in very large firms. Diminishing returns explain the short-run curve where a factor is fixed, whereas in the long run all inputs are variable.
- ALaw of diminishing returns to a variable factor with other factors fixed
- BDiseconomies of scale arising from managerial and coordination problems at large sizeCorrect
- CRise in short-run fixed costs only
- DIncreased specialisation of labour
Explanation
In the long run all factors are variable, so the upward slope of LRAC is due to diseconomies of scale such as management difficulties. Diminishing returns apply to the short run, when at least one factor is fixed, so that option is wrong. Specialisation lowers cost on the falling part.
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