Final answer:
In the context of the long-run average cost curve, a rising LRAC indicates the firm is experiencing diseconomies of scale, and average costs increase with output. This occurs after economies of scale have been exhausted, which would be represented by a flat or downward-sloping segment of the curve. The correct answer to the given question is option B, which identifies this scenario as diseconomies of scale with increasing average costs.
Step-by-step explanation:
Over the range of output where the long-run average cost (LRAC) curve is rising, the firm is experiencing diseconomies of scale. As output increases in this range, average costs are increasing. When the LRAC is upward-sloping, it indicates that increasing the production scale leads to higher per-unit costs, typically because of factors such as management challenges or inefficiencies that arise when a firm grows too large.
The middle portion of the LRAC curve, which is flat around a quantity we could call Q3, signifies constant returns to scale, where average costs do not change significantly as the scale of production increases or decreases. Diseconomies of scale are contrasted with economies of scale, observed when the LRAC is downward-sloping, implying that larger production levels lead to lower average costs.
The proper answer to the student's question is: Over the range of output where the LRAC curve is rising, the firm is experiencing diseconomies of scale, and as output increases, average costs are increasing. Hence, the correct option is B. Diseconomies of scale, increasing.