Final answer:
Over the range of output where the LRAC curve is falling, the firm is experiencing economies of scale, leading to decreasing average costs. After a certain output level, the firm faces constant returns to scale with average costs remaining consistent.
Step-by-step explanation:
Over the range of output where the Long-Run Average Cost (LRAC) curve is falling, the firm is experiencing economies of scale. As output increases, average costs are decreasing. This downward slope of the LRAC curve suggests that the firm is getting more efficient at producing goods or services, resulting in a lower cost per unit of output. Eventually, if the firm expands production further, it will reach a point where economies of scale have been exhausted, depicted by a flat portion of the LRAC around Q3. At this stage, the average cost of production experiences constant returns to scale, meaning that increasing all inputs proportionately does not significantly change the unit cost.
This indicates an optimal range of production for cost efficiency, usually where the LRAC curve bottoms out or has a flat-bottomed section.According to Figure 7.11, the LRAC curve can show a clear minimum point where firms producing at this output level will have the lowest costs, or it may have a flat bottom allowing firms to compete effectively over a range of output levels without experiencing higher average costs. Beyond these optimal points, average costs will start to rise, indicating diseconomies of scale.