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.
LRMC cuts the LRAC curve from below at the point where ..............
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → LRAC is at minimum
The relationship between Long-Run Marginal Cost (LRMC) and Long-Run Average Cost (LRAC) is similar to that between short-run MC and AC.
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When LRMC < LRAC, the LRAC curve is falling.
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When LRMC > LRAC, the LRAC curve is rising.
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When LRMC = LRAC, the LRAC curve is neither rising nor falling, i.e., it is at its minimum point.
