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.
At the minimum point of the long run average cost (LRAC) curve, constant returns to scale (CRS) is observed. Returns to scale show how output responds when all inputs are raised in the same proportion. In a typical firm, increasing returns come first, then constant returns, and then decreasing returns.
Option (1) Decreasing Returns to Scale. — Incorrect. To raise output by a certain proportion, inputs must rise by more than that proportion. So average cost rises, and this is the upward rising part of LRAC.
Option (2) Constant Returns to Scale. — Correct. Inputs and output rise in the same proportion, so average cost stays the same. LRAC has stopped falling and has not started rising, which is its lowest point.
Option (3) Law of Variable Proportions. — Incorrect. This law says that the marginal product of an input first rises and then falls while another input is held fixed. In the long run all inputs can vary, so returns to scale decide the shape of LRAC.
Option (4) Increasing Returns to Scale. — Incorrect. To raise output by a certain proportion, inputs need to rise by less than that proportion. So average cost falls, and this is the downward sloping part of LRAC.
NCERT (2026-27): “3.6 Returns to Scale … The law of variable proportions arises because factor proportions change as long as one factor is held constant and the other is increased.… …One special case in the long run occurs when both factors are increased by the same proportion, or factors are scaled up.… Shapes of the Long Run Cost Curves …IRS implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion. In other words, to increase output by a certain proportion, inputs need to be increased by less than that proportion.… …It must be the case that as long as IRS operates, average cost falls as the firm increases output.… …DRS implies that if we want to increase the output by a certain proportion, inputs need to be increased by more than that proportion. As a result, cost also increases by more than that proportion. So, as long as DRS operates, the average cost must be rising as the firm increases output.… …CRS implies a proportional increase in inputs resulting in a proportional increase in output. So the average cost remains constant as long as CRS operates.… …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.…” |