A firm’s long run average cost (LRAC) is Rs 20 at 6 units of output and Rs 21 at 7 units. Which of the following is correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → The LRMC of the 7th unit is Rs 27, and LRAC is rising because LRMC is above LRAC.
Given:
LRAC at 6 units = Rs 20
LRAC at 7 units = Rs 21
Total cost = LRAC × output; LRMC is the change in total cost.
\( \displaystyle TC_6 = 20 \times 6 = 120 \)
\( \displaystyle TC_7 = 21 \times 7 = 147 \)
\( \displaystyle LRMC_7 = 147 - 120 = \text{Rs } 27 \)
LRMC (27) is above LRAC (21), and when marginal cost is above average cost the average rises. What decides it is LRMC being above LRAC, not LRMC itself rising.
NCERT (2026-27): “3.7.2 Long Run Costs … Long run marginal cost (LRMC) is the change in total cost per unit of change in output. When output changes in discrete units, then, if we increase production from q1–1 to q1 units of output, the marginal cost of producing …” “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.” |