Question

explain the relationship between LAC and LMC​

Answer 1

Answer:

In the long-run, the ability to change capital input allows the firm to reduce costs along its expansion path as we can look at the long-run average (LRAC) and marginal cost curves.

The most important determinant of the shape of the LRAC and LMC curves is whether there are increasing, constant, or decreasing returns to scale.Suppose that the firm’s production process exhibits constant returns to scale, and, thus, the average cost of production must be the same for all levels of output.

Suppose instead, that the firm’s production process is subject to increasing returns to scale and the average cost of production falls as output increases. Similarly, when there are decreasing returns o scale the average cost of production must be increasing with output. Fig. 7.6 shows a typical LRAC and LRMC.The LAC curve is U-shaped, just like the SAC curve but the source of the U-shape is increasing and decreasing returns to scale, rather than diminishing returns to a factor of production. In the long-run, it may be in the firm’s interest to change the input propositions as the level of output changes. When input proportions do change, the concept of returns to scale no longer applie