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

The long-run average cost (LAC) curve is often described as an 'envelope curve'. This is because it:

The LAC curve is called an envelope curve because it is tangent to each short-run average cost curve and lies on or below them, enclosing them from below. It shows the minimum cost of each output when the plant size can be changed.

  1. ALies above all the short-run average cost curves at every output level
  2. BIs drawn by joining the minimum points of all short-run average cost curves
  3. CTouches each short-run average cost curve from below, enclosing themCorrect
  4. DIs a horizontal line representing fixed costs over all plant sizes

Explanation

Each short-run average cost (SAC) curve corresponds to a given plant size. The LAC shows the lowest possible cost of producing each output when plant can be varied, so it touches each SAC curve at one point and lies on or below the SACs, enveloping them from below. Joining the SAC minimum points is wrong, since the LAC is tangent to SACs at points other than their minima, except at the optimum scale.

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