Assertion: LRMC curve is a ‘U’-shaped curve.
Reasoning: As long as average cost is falling, marginal cost must be more than the average cost. When the average cost is rising, marginal cost must be less than the average cost.
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Assertion (A) is true but Reasoning (R) is not correct.
Assertion (A) is correct:
- The Long-Run Marginal Cost (LRMC) curve is typically U-shaped due to economies and diseconomies of scale.
- Initially, as production increases, LRMC falls due to increasing returns to scale (efficiency, specialization).
- Eventually, LRMC starts rising due to decreasing returns to scale (coordination issues, inefficiencies).
- This results in a U-shaped LRMC curve.
Reasoning: As long as average cost is falling, marginal cost must be more than the average cost. When the average cost is rising, marginal cost must be less than the average cost. This is incorrect. The relationship between marginal cost (MC) and average cost (AC) is as follows:
- When AC is falling, MC must be below AC. This is because each additional unit (marginal cost) is pulling the average down.
- When AC is rising, MC must be above AC. This is because each additional unit (marginal cost) is pulling the average up.
- When AC is at its minimum, MC is equal to AC.