Answer to Question #110314 in Microeconomics for Vivek

Question

Describe with the help of a diagram interaction between the Short-run Average Total
Cost curves and the Long-run Average Total Cost curve given that the firm has five
plant sizes to consider viz. I, II, III, IV and V (in ascending order of their size),
wherein plant size III turn out to be optimal plant size in the long run.

Answer 1

The long-run average cost (LRAC) curve shows the firm’s lowest cost per unit at each level of output, assuming that all factors of production are variable.

The LRAC curve is derived from this set of short-run curves by finding the lowest average total cost associated with each level of output. The U-shaped LRAC curve is an envelope curve that surrounds the various short-run ATC curves.