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

Shapes of the Long Run Cost Curves

It is argued that in a typical firm IRS is observed at the initial level of production. This is then followed by the CRS and then by the DRS. LRAC curve 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 curve cuts the LRAC curve from below at the minimum point of the LRAC.

As long as average cost is falling

Marginal cost < Average cost

The correct answer is Option (2) → Marginal cost < Average cost

When the Average Cost (AC) curve is falling, it means each additional unit (marginal unit) costs less than the average of all previous units.

• Hence, the Marginal Cost (MC) must be below the Average Cost (AC) curve.

• This pulls the average cost downward, just as a low test score lowers a persons average score.