Read the passage carefully and answer the questions based on the passage:

Long Run Costs

In the long run, all inputs are variable. There are no fixed costs. The total cost and the total variable cost therefore, coincide in the long run. Long run marginal cost is the change in total cost per unit of change in output. Increasing returns to scale implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion. Decreasing returns to scale implies that if we want to increase the output by a certain proportion, inputs need to be increased by more than that proportion. Constant returns to scale implies a proportional increase in inputs resulting in a proportional increase in output. So the average cost remains constant as long as CRS operates. The LRAC curve is a 'U'-shaped curve. Its downward sloping part corresponds to IRS and upward rising part corresponds to DRS. At the minimum point of the LRAC curve, CRS is observed. For the first unit of output, both LRMC and LRAC are the same. Then, as output increases, LRAC initially falls, and then, after a certain point, it rises. As long as average cost is falling, marginal cost must be less than the average cost. When the average cost is rising, marginal cost must be greater than the average cost. LRMC cuts the LRAC curve from below at the minimum point of the LRAC.

As long as decreasing returns to scale operates, as the firm increases output, the average cost must be..............

Rising

The correct answer is Option (1) → Rising

The passage states: “The LRAC curve is a ‘U’-shaped curve. Its downward sloping part corresponds to increasing returns to scale and upward rising part corresponds to decreasing returns to scale.”

This means that when a firm experiences decreasing returns to scale (DRS) — inputs must increase more than proportionately to raise output — the average cost increases. Hence, as long as decreasing returns to scale operates, the average cost must be rising.