Which of the following statement (s) is/are correct?

Statement 1: For the first unit of output, both LRMC and LRAC are the same.

Statement 2: Then, as output increases, LRAC initially falls, and then, after a certain point, it rises.

Both statements are correct.

The correct answer is Option 3: Both statements are correct.

Statement 1: For the first unit of output, both LRMC and LRAC are the same. Correct. Consider producing just one unit of output. The firm will choose the smallest possible plant size suitable for this output level. For this single unit, the total cost and the average cost will be the same. Since marginal cost is the change in total cost from producing one more unit, and we're starting from zero, the cost of the first unit is the marginal cost at that point. Therefore, for the very first unit, LRMC and LRAC are indeed equal.

Statement 2: Then, as output increases, LRAC initially falls, and then, after a certain point, it rises. This is also correct. This describes the U-shaped LRAC curve, due to economies and diseconomies of scale:

• Initially, LRAC falls due to increasing returns to scale (economies of scale).

• After a certain level of output, LRAC rises due to decreasing returns to scale (diseconomies of scale).

• Therefore, Statement 2 accurately describes the behavior of the LRAC curve as output increases.