Answer to Question #304834 in Microeconomics for Piyush

Question

Sketch the long run average cost curve from the short run AC curves. Why is it called the planning curve?Is the long run marginal cost curve an envelope curve. Explain?

Answer 1

The long-run average cost (LRAC) curve is referred to as an envelope curve of the Short-run average cost (SRAC) curve as depicted in the figure above.

a- Is the increasing return to scale.

b- is the constant return to scale.

c- is the decreasing return to scale.

The long-run average cost curve is known as a planning curve since a firm plans to produce an output in the long run by selecting a plant on the long-run average cost curve which corresponds to the output. This helps a firm to decide on the size of the plant for producing desired output at the least possible cost.

YES, it is an envelope curve since it envelopes all the short-run average cost curves. It envelopes all the points of production in the short run.