At the minimum point of the long run average cost curve............ is observed.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Constant Returns to Scale.
The Long-Run Average Cost (LAC) curve is U-shaped because of the operation of returns to scale:
-
When a firm experiences increasing returns to scale, output increases more than proportionately to input, so LAC falls.
-
When decreasing returns to scale set in, output increases less than proportionately, so LAC rises.
-
At the minimum point of the LAC curve, output increases in the same proportion as inputs, meaning returns to scale are constant.