A student has just written on an exam that, in the long run, fixed cost will mak
ID: 1206549 • Letter: A
Question
A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect?
a) In the long run, there are no fixed costs, meaning the average total cost curve shifts down.
b) In the long run, fixed cost decreases as costs are spread out over a greater quantity of output. Declining fixed cost accounts for the downward-sloping average total cost curve.
c) In the long run, fixed cost increases as firms build new plants and purchase new capital. This means that the average total cost curve will eventually slope upward.
d) In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.
Explanation / Answer
Answer The corrcet answer is d) In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.
Reason: The professor has marked it incorrect because in the long run no cost is fixed, all the costs are variable, only in case of short run both the fixed and variable costs are there. In the long run the firms changes the level of prodcution only on the basis of profits and losses. In the long run the firm minimizes the average cost with additional output. In the long run firm takes the decision whether to continue with the production or shut down depending upon the cost and profits.
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