Question

The long-run average cost curve is the relationship between the lowest attainable average total cost and output, when plant size is _____ and labour is _____. The long-run average cost curve is made up of the segments of individual average _____ cost curves with the lowest average _____ cost for a given output.

A. held constant; varied; total; total
B. varied; held constant; variable; variable
C. held constant; varied; variable; variable
D. varied; varied; variable; variable
E. varied; varied; total; total

Answer 1

The correct answer is E. varied; varied; total; total.

Step-by-step explanation:

The long-run average cost curve is the relationship between the lowest attainable average total cost and output, when both plant size and labor are able to be varied. This curve is generated by the segments of individual short-run average total cost curves that have the lowest average total cost for a given level of output.

When a firm is planning for long-term production, like at an output of Q3, it should choose the investment level corresponding to the short-run average total cost curve (SRAC3) that delivers Q3 at the lowest cost. Avoiding higher fixed costs as with SRAC4, or higher variable costs as with SRAC2, ensures that production occurs at the lowest average total cost possible.