Answer to Question #234887 in Economics for Andiswa

Question

 Explain the three categories of returns to scale relating to the long-run average cost curve.

Answer 1

There are three kinds of returns to scale: constant returns to scale, increasing returns to scale, and decreasing returns to scale.

Firms experience economies of scale, otherwise known as increasing returns to scale, when the firm's long-run average total cost becomes smaller as output is increasing.

They experience economies of scale (increasing returns to scale) when the long-run average cost curve is downwards sloping.