Long Run Average Cost (or LAC)

-Constant Returns to Scale

• If the input is doubled, the output will double and average cost is constant at all the levels of output.

-Increasing Returns to Scale

• If the input is doubled, outputs will double and average cost decreases at all the levels of output.

-Decreasing Returns to the Scale

• If input is doubled, increase in output is less than twice and the average cost increases with the output.

-In the long run:

• Firms experience increasing and decreasing returns to scale and therefore long run average cost is "U" shaped.

-Long run marginal cost(LMC) leads long run average cost(LAC):

• If LMC < LAC, LAC will decrease
• If LMC > LAC, LAC will increase
• Thus, LMC = LAC at the minimum of LAC

Question

-What is relationship between long run average cost and long run marginal cost when long run average cost is constant?