Assertion: LRAC curve is a ‘U’-shaped curve.

Reasoning: In a typical firm, DRS is observed at the initial level of production. This is then followed by the CRS and then by the IRS.

Assertion (A) is true but Reasoning (R) is not correct.

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.