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CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

In the long run, the long-run average cost (LAC) curve of a firm is best described as the curve that:

The long-run average cost curve shows the lowest possible average cost of producing each output level when all inputs, including plant size, can be varied. It envelops the short-run average cost curves, so it is a planning curve.

  1. AShows the lowest possible average cost of producing each level of output when all inputs can be variedCorrect
  2. BShows average cost when only labour can be varied and capital is fixed
  3. CIs the vertical sum of all short-run average fixed cost curves
  4. DAlways slopes upward because of the law of diminishing returns

Explanation

The LAC curve traces the minimum average cost for each output level when the firm can adjust all factors, including plant size. It is the envelope of the short-run average cost curves. Option B describes a short-run situation with a fixed factor.

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