In the long run, the shut down point of a firm is the minimum point o…

In the long run, the shut down point of a firm is the minimum point of its LRAC curve. For a typical firm, which of the following is correct at this point?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → LRMC is equal to LRAC, and constant returns to scale are observed

At the minimum point of LRAC, two things hold: the LRMC curve cuts LRAC there, so LRMC = LRAC, and the firm is at constant returns to scale, between the IRS and DRS stretches.

Option (1) LRMC is equal to LRAC, and increasing returns to scale are observed — Incorrect. IRS is on the falling part of LRAC, before its minimum.

Option (2) LRMC is less than LRAC, and constant returns to scale are observed — Incorrect. LRMC is below LRAC only while LRAC is falling.

Option (3) LRMC is equal to LRAC, and constant returns to scale are observed — Correct. Both parts hold at the lowest point of LRAC.

Option (4) LRMC is greater than LRAC, and decreasing returns to scale are observed — Incorrect. LRMC above LRAC and DRS belong to the rising part of LRAC, after its minimum.

This question uses Production and Costs and The Theory of the Firm under Perfect Competition together.

NCERT (2026-27): “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. Accordingly, 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.”

“Shapes of the Long Run Cost Curves … Let us check how the LRMC curve looks like. 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 is therefore a ‘U’-shaped curve. It cuts the LRAC curve from below at the minimum point of the LRAC.”

Introductory Microeconomics - Chapter 4, The Theory of the Firm under Perfect Competition: “4.4.3 The Shut Down Point … This point is called the short run shut down point of the firm. In the long run, however, the shut down point is the minimum of LRAC curve.”