I. LAC curve for a normal production function
II. LAC curve for a linear production function
III. Planning curve
IV. Envelope curve
Codes:
Determining Minimum Long Run Average Cost
The minimum Long Run Average Cost (LAC) represents the most cost-efficient scale of production for a firm when all inputs can be adjusted. It can be identified using several related economic concepts.
Analysis of Options
- I. LAC curve for a normal production function: The LAC curve itself illustrates the minimum average cost for each output level in the long run. The lowest point on this U-shaped curve signifies the minimum LAC achievable.
- III. Planning curve: Often used interchangeably with the LAC curve, the planning curve helps firms plan their long-run operations. Identifying the minimum point is crucial for determining the optimal scale of production.
- IV. Envelope curve: The LAC curve is technically known as the envelope curve because it is formed by enveloping all possible Short Run Average Cost (SRAC) curves. The point where the LAC curve reaches its lowest value is the minimum LAC.
- II. LAC curve for a linear production function: Linear production functions typically imply constant returns to scale. In such cases, the LAC might be horizontal or continuously declining, meaning a distinct minimum point (in the traditional U-shaped sense) might not exist or be determinable in the same way as with production functions exhibiting economies and diseconomies of scale.
Conclusion
Therefore, the minimum Long Run Average Cost (LAC) is determined by the LAC curve itself (derived from normal production functions), which functions as a planning curve and is also known as the envelope curve.
The correct options are I, III, and IV.
Important Questions from Short-run and long-run cost curves
- L shaped average cost curve is witnessed in the large firms because
A multiproduct firm compares temporary shutdown with its best feasible operating product mix. Assume no shutdown/restart cost and unchanged unavoidable costs. Which pair of totals is sufficient for this comparison?
A. Past sunk investment
B. Last year’s revenue
C. Total revenue from the proposed operating mix
D. Total operating costs that would be avoided by shutting downMatch the items of the List – I with those of List – II and suggest the correct code :
List – I List – II a. Constant average cost over a range of output i. Economic capacity b. Average cost becomes constant momentarily ii. Reserve capacity c. Normal average cost is a U-shaped curve iii. Production and Managerials costs effects d. Modern Long-run average cost is L-shaped iv. Economies and Diseconomies Codes :
a b c d
Match the items of List - I with those of the List - II and indicate the correct code :
List - I List - II (a) Excess capacity of the plant (i) Cost reduction with output expansion (b) Resorting to New Technology (ii) Constant cost with output expansion (c) Setting up of the Training Institutions (iii) Internal economies (d) Reserve capacity of the plant (iv) External economies Codes :
(a) (b) (c) (d)
