Study the given figure. The portion of LRAC curve highlighted by orange colour in the graph explains which concept?

Constant returns to Scale

The correct answer is Option 1: Constant returns to Scale

1. Understanding the LRAC Curve:

   • The LRAC curve represents the lowest possible cost at which a firm can produce any given level of output in the long run when all inputs are variable.
   • It is typically U-shaped due to economies and diseconomies of scale.

2. Interpretation of the Orange Highlighted Portion:

   • The orange-highlighted portion is at the lowest point of the LRAC curve (M), where costs remain constant as output increases.
   • This implies that the firm is experiencing constant returns to scale, meaning that increasing input proportionally results in an equal proportional increase in output, keeping average cost unchanged.