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

The U-shape of the long-run average cost curve is mainly explained by:

The U-shape of the long-run average cost curve arises because economies of scale reduce average cost at first, while diseconomies of scale such as managerial and coordination problems raise it once the firm becomes very large.

  1. AEconomies of scale at first and diseconomies of scale later as the firm grows very largeCorrect
  2. BFixed costs being spread over more units in the short run only
  3. CRising prices of the product as output expands
  4. DDiminishing marginal utility of consumers

Explanation

LAC falls initially due to economies of scale such as specialisation and bulk buying. At very large size, management and coordination problems create diseconomies, so LAC rises. Option B relates to the short-run, not the long run.

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