Question

Which of the following is true with regards to a long-run cost function?

1) The shape of the firm's long-run cost function is important in decisions to expand the scale of operations
2) The long-run average cost curve is U-shaped
3) The long-run average cost curve is flatter than the short-run average cost curve.
4) The curve consists of the lower boundary of all the short-run cost curves
5) All of the above

Answer 1

All the statements provided about the long-run cost function are true. The LRAC curve is U-shaped, flatter than the SRAC curve, and represents the lower boundary of all short-run cost curves. It shows the relationship between output levels and average costs under economies of scale.

Step-by-step explanation:

The understanding of the long-run cost function is key in business economics, specifically when a firm considers expanding its scale of operations. To answer the student's question, all of the listed statements are true regarding a long-run cost function:

When a firm operates under economies of scale, an increase in production leads to lower average costs. This downward slope from output levels Q₁ to Q₂ to Q₃ on the LRAC curve signifies the benefit of scaling up production. As all factors of production can be varied in the long run, unlike in the short run where some costs are fixed, the LRAC curve shows this flexibility and potential for cost optimizations over time.