Chapter 7: Problem 19

long-run constant returns to scale exist when the a. short-run average total cost curve is constant. b. long-run average cost curve rises. c. long-run average cost curve is flat. d. long-run average cost curve falls.

Short Answer

Expert verified

In the case of long-run constant returns to scale, the long-run average cost curve remains flat, as the firm's production efficiency does not change with its scale of production. Therefore, the correct option is: c. long-run average cost curve is flat.

Step by step solution

Definition of Long-Run Constant Returns to Scale

Long-run constant returns to scale exist when an equal proportion of increase in all inputs results in the same proportion of output increase. In other words, if we double the inputs (labor, capital, raw materials, etc.), the output will also double. This indicates that the firm's production efficiency remains constant as it expands its scale of production.

Recognizing Long-Run Average Cost Curve

The long-run average cost curve represents the lowest average cost of producing different output levels when all inputs are variable. A firm can alter its scale of production (i.e., produce more or less) in the long run, and its cost structure will change accordingly.

Long-Run Average Cost Curve and Constant Returns to Scale

When constant returns to scale are present, the long-run average cost curve remains flat at a certain average cost level. This is because the firm's production efficiency remains constant across its scale of production. As a result, the average cost does not change as the firm moves from one scale of production to another.

Selecting the Correct Option

Based on the explanations above, the correct option that represents the existence of long-run constant returns to scale is: c. long-run average cost curve is flat.

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