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

Answer:

To understand the derivation of a long run average cost curve, let’s consider three short run average cost curves (SACs) as shown in Fig. 1 below.

long run average cost curve

These SACs are also called plant curves. In the short run, a firm can operate on any SAC, given the size of the plant. For the sake of our understanding, let’s assume that there are only three plants that are technically possible. Therefore, the firm increases or decreases its outputs by changing the amount of the variable inputs.