Answer to Question #72080 in Macroeconomics for nadir

Question

Draw a diagram to show the long run average total cost of a firm. explain the relationship between output level and LRATC in different phases of expansion of the firm

Answer 1

The long-run average cost curve is the envelope of an infinite number of short-run average total cost curves, with each short-run average total cost curve tangent to, or just touching, the long-run average cost curve at a single point corresponding to a single output quantity. The key to the derivation of the long-run average cost curve is that each short-run average total cost curve is constructed based on a given amount of the fixed input, usually capital. As such, when the quantity of the fixed input changes, the short-run average total cost curve shifts to a new location.
Reference:
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