LRAC

Question 1

LONG RUN AVERAGE COSTS

Answer 1

A period where all factors of production are variable.
Businesses can adjust land, labor, capital, and enterprise.

Question 2

Scaling Up

Answer 2

refers to the increase in factors of production.
The focus in the long run is on returns to scale.

Question 3

Stage One (Increasing Returns to Scale)

Answer 3

Output increases more than inputs. (FOP)
Costs rise, but output rises faster, leading to decreased average costs.

Question 4

Stage Two (Constant Returns to Scale):

Answer 4

Output increases in proportion to inputs
Average costs remain constant, reflecting a balance between input and output.

Question 5

Stage Three (Decreasing Returns to Scale):
What happens to average costs?

Answer 5

Output increases less than inputs
Costs rise faster than output, resulting in increasing average costs.

Question 6

What does economies of scale lead to?
What return to scale?

Answer 6

increased production efficiency and decreasing average costs.
INCREASING RTS

Question 7

What does diseconomies of scale lead to?
What return to scale?

Answer 7

reduced efficiency and increased average costs.
decreasing RTS