Assertion: LRAC curve is a ‘U’-shaped curve. Reasoning: In a typical…

The correct answer is Option 3: Assertion (A) is true but Reasoning (R) is not correct.

Assertion (A) is correct:

• The Long-Run Average Cost (LRAC) curve is typically U-shaped due to economies and diseconomies of scale.
• Initially, as production increases, average cost falls due to economies of scale (increased efficiency, bulk purchasing, specialization).
• After a certain point, costs start rising due to diseconomies of scale (management inefficiencies, coordination problems).
• This results in a U-shaped LRAC curve.

Reasoning (R) is incorrect:

• The reasoning mentions Decreasing Returns to Scale (DRS) at the initial level of production, which is incorrect.
• The correct sequence in the long run is:
  1. Increasing Returns to Scale (IRS) → Leads to falling costs (economies of scale).
  2. Constant Returns to Scale (CRS) → Cost remains stable.
  3. Decreasing Returns to Scale (DRS) → Leads to rising costs (diseconomies of scale).
• Since the reasoning incorrectly states that DRS occurs at the beginning, it is incorrect.