Question

LRAC is defined as ______.

• A. long run cost per unit of output
• B. long run profit per unit of output
• C. long run revenue per unit of output
• D. none of these

Answer 1

The correct option is A long run cost per unit of output

The long run cost describes the behavior of the average cost (per unit cost) in the long term. The LRAC is an envelop curve of all the short run cost curve, the short run curve at the minimum efficiency point represents optimal plant size. The long run average cost curve takes a U shape to illustrate how average cost initially decreases due to economies of scale while the firm experiences increasing returns to scale. Then it exhibits constant returns as the firm operates at its optimal size. Lastly if the firm tries to expand more than its optimal point, due to diseconomies of scale while the firm experiences decreasing returns to scale and average cost increases.