Which of the following is true regarding the long run average total cost curve?

What Is the Long Run?

The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas in the short run firms are only able to influence prices through adjustments made to production levels. Additionally, while a firm may be a monopoly in the short term, they may expect competition in the long run.

Long Run

Key Takeaways

• The long run refers to a period of time where all factors of production and costs are variable.
• Over the long run, a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost.
• The long run is associated with the LRAC curve along which a firm would minimize its cost per unit for each respective long run quantity of output.
• When the LRAC curve is declining, internal economies of scale are being exploited—and vice versa.

How the Long Run Works

A long run is a time period during which a manufacturer or producer is flexible in its production decisions. Businesses can either expand or reduce production capacity or enter or exit an industry based on expected profits. Firms examining a long run understand that they cannot alter levels of production in order to reach an equilibrium between supply and demand.

In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy. This stands in contrast to the short run, when these variables may not fully adjust. Also, long run models may shift away from short-run equilibrium, in which supply and demand react to price levels with more flexibility.

In response to expected economic profits, firms can change production levels. For example, a firm may implement change by increasing (or decreasing) the scale of production in response to profits (or losses), which may entail building a new plant or adding a production line. The short-run, on the other hand, is the time horizon over which factors of production are fixed, except for labor, which remains variable.

Example

For example, a business with a one-year lease will have its long run defined as any period longer than a year since it’s not bound by the lease agreement after that year. In the long run, the amount of labor, size of the factory, and production processes can be altered if needed to suit the needs of the business or lease issuer.

Long Run and the Long-Run Average Cost (LRAC) 

Over the long run, a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. If a company is not producing at its lowest cost possible, it may lose market share to competitors that are able to produce and sell at minimum cost.

The long run is associated with the long-run average (total) cost (LRAC or LRATC), the average cost of output feasible when all factors of production are variable. The LRAC curve is the curve along which a firm would minimize its cost per unit for each respective long run quantity of output.

The LRAC curve is comprised of a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. The LRAC curve will, therefore, be the least expensive average cost curve for any level of output. As long as the LRAC curve is declining, then internal economies of scale are being exploited.

Economies of Scale

Economies of scale refer to the situation wherein, as the quantity of output goes up, the cost per unit goes down. In effect, economies of scale are the cost advantages that are achieved when there is an expansion of the size of production. The cost advantages translate to improved efficiency in production, which can give a business a competitive advantage in its industry of operations, which, in turn, could translate to lower costs and higher profits for the business.

If LRAC is falling when output is increasing, then the firm is experiencing economies of scale. When LRAC eventually starts to rise then the firm experiences diseconomies of scale, and if LRAC is constant then the firm is experiencing constant returns to scale.

1. Which of the following is a variable cost?

   a. Interest payments
   b. Raw materials costs
   c. Property taxes
   d. All of the above are variable costs.
   

2. Which of the following is an implicit cost?

   a. The salary earned by a corporate executive
   b. Depreciation in the value of a company-owned car as it wears out
   c. Property taxes
   d. All of the above are implicit costs.
   

3. If the output levels at which short-run marginal and average cost curves reach a minimum are listed in order from smallest to greatest, then the order would be

   a. AVC, MC, ATC
   b. ATC, AVC, MC
   c. MC, AVC, ATC
   d. AVC, ATC, MC
   

4. Learning curves represent the relationship between

   a. average variable cost and the number of units produced per time period.
   b. average variable cost and the cumulative number of units produced.
   c. total cost and technology.
   d. average variable cost and the rate of increase in technology.
   

5. If an input is owned and used by a firm, then its

   a. explicit cost is zero.
   b. implicit cost is zero.
   c. opportunity cost is zero.
   d. economic cost is zero.
   

6. Short-run marginal cost is equal to

   a. the change in total cost divided by the change in output.
   b. the change in total variable cost divided by the change in output.
   c. the cost per unit of the variable input divided by the marginal product of the variable input.
   d. all of the above.
   

7. Short-run average variable cost is equal to

   a. total variable cost divided by output.
   b. average total cost minus average fixed cost.
   c. the cost per unit of the variable input divided by the average product of the variable input.
   d. all of the above.
   

8. Which of the following short-run cost curves declines continuously?

   a. Average total cost
   b. Marginal cost
   c. Average fixed cost
   d. Average variable cost
   

9. The law of diminishing returns begins at the level of output where

   a. marginal cost is at a minimum.
   b. average variable cost is at a minimum.
   c. average fixed cost is at a maximum.
   d. None of the above is correct.
   

10. The long-run average cost curve is at a minimum at a level of output where

    a. the firm is experiencing constant returns to scale.
    b. it is equal to long-run marginal cost.
    c. the long-run average cost curve is tangent to the lowest point on a short-run average total cost curve.
    d. all of the above occur.
    

11. If a firm has a downward sloping long-run average cost curve, then

    a. it is experiencing decreasing returns to scale.
    b. it is experiencing decreasing returns.
    c. it is a natural monopoly.
    d. marginal cost is greater than average cost.
    

12. One reason that a firm may experience increasing returns to scale is that greater levels of output make it possible for the firm to

    a. employ more specialized machinery.
    b. obtain bulk purchase discounts.
    c. employ a greater division of labor.
    d. All of the above are correct.
    

13. One reason that a firm may experience decreasing returns to scale is that greater levels of output can result in

    a. a greater division of labor.
    b. an increase in meetings and paperwork.
    c. smaller inventories per unit of output.
    d. All of the above are correct.
    

14. Economies of scope refers to the decrease in average total cost that can occur when a firm

    a. produces more than one product.
    b. has monopoly power in world markets.
    c. controls the raw materials used as inputs.
    d. narrows the scope of its regional markets.
    

15. Breakeven analysis identifies the

    a. profit-maximizing level of output.
    b. level of output where economic profit is equal to zero.
    c. level of output where marginal revenue is equal to marginal cost.
    d. All of the above are correct.
    

16. Which of the following is an assumption of linear breakeven analysis?

    a. Output price is constant
    b. Average variable cost is constant
    c. Average fixed cost is constant
    d. All of the above are assumptions of linear breakeven analysis.
    

17. The responsiveness or sensitivity of a firm's profits to changes in output is measured by a firm's

    a. operating leverage.
    b. contribution margin per unit.
    c. degree of operating leverage.
    d. returns to scale.
    

18. Which of the following values cannot be calculated at the firm's breakeven level of output?

    a. operating leverage.
    b. contribution margin per unit.
    c. degree of operating leverage.
    d. profit.
    

19. If a linear short-run variable cost function is estimated using cross-sectional data, then the corresponding marginal cost function will be

    a. U-shaped.
    b. upward-sloping.
    c. downward-sloping.
    d. horizontal.
    

20. The survival technique

    a. can be used to estimate short-run total variable cost functions.
    b. is based on a technical knowledge of a firm's production function.
    c. uses regression analysis in combination with time-series or cross-sectional data.
    d. None of the above is correct.
    

21. The process whereby firms reduce their production costs by taking advantage of international differences in the prices of inputs and international similarities in preferences is referred to as the

    a. strategic opportunity concept.
    b. new international economies of scale.
    c. global dictum.
    d. transnational cost theorem.
    

22. Which of the following would be referred to as "outsourcing?"

    a. Marketing products outside of a firm's home country
    b. Hiring temporary workers on a contract basis
    c. Subcontracting production to firms in other countries
    d. Identifying and implementing production innovations
    

23. When a firm designs a core product for the entire world that can be adapted in a number of ways to accommodate different types of markets, it is taking advantage of the

    a. strategic opportunity concept.
    b. new international economies of scale.
    c. global dictum.
    d. transnational cost theorem.
    

24. The Japanese cost-management system involves

    a. designing a product and then determining the cost of producing it.
    b. a new system of accounting for capital depreciation.
    c. determining how much a product should cost and then determining how it should be produced.
    d. minimizing international transportation costs.
    

25. The contribution margin per unit is equal to the

    a. price of a good.
    b. the difference between total revenue and total cost.
    c. difference between price and average total cost.
    d. difference between price and average variable cost.