Answer to Question #48080 in Microeconomics for jess

Question

the productions condition in an industry are such that average costs of production are constantly decreasing for the firm as its level of output increases. is this condition consistent with a stable long run competitive equilibrium. why or why not

Answer 1

In the long run, there are no fixed inputs. As such, marginal returns and especially the law of diminishing marginal returns do not operate and do not guide production and cost. Instead long-run average cost is affected by increasing and decreasing returns to scale, which translates into economies of scale and diseconomies of scale. Scale economies and returns to scale generally produce a U-shaped long-run average cost curve. The negatively-sloped portion of this long-run average cost curve reflects economies of scale and increasing returns to scale. The positively-sloped portion reflects diseconomies of scale or decreasing returns to scale.
So, in the long-run average total cost curve is not constantly decreasing and a stable long run competitive equilibrium will be in the minimum point of this curve.