LONG RUN AVERAGE COST CURVE ALONG WITH THEORY AND OBJECTIVE QUESTIONS

   REVISE ECONOMICS FOR COMPETITIVE EXAM ALONG WITH THEORY AND OBJECTIVE QUESTIONS
LONG RUN AVERAGE COST CURVE
ECONOMICS FOR COMPETITIVE EXAM

   THE OBJECTIVE TYPE QUESTIONS

   THE LOCUS OF POINTS REPRESENTING THE LEAST UNIT COST OF PRODUCING DIFFERENT OUTPUT IS CALLED:-

1.       SAC

2.       SMC

3.       LMC

4.       LAC SO THE RIGHT ANSWER IS LAC

AT THE OPTIMUM LEVEL OF OUTPUT

a)       LAC>LMC

b)       LAC=LMC ANSWER IS B

c)        LAC<LMC

d)       LAC=0

• LAC DECLINES UPTO THE OPTIMUM OUTPUT WITH

a)       INCREASING OUTPUT SO THE RIGHT ANSWER IS (a)

b)       CONSTANT OUTPUT

c)        DECREASING OUTPUT

d)       CONSTANT OUTPUT 

WHEN A FIRM EXPERIENCE EXTERNAL ECONOMIES,ITS COST CURVE

a)       SHIFT DOWNWARD

b)       SHIFT UPWARD

c)        REMAIN UNCHANGED

d)       NONE OF THE ABOVE

• IF THE SLOPE OF AC IS POSITIVE THEN

a)       MC<AC

b)       MC>AC

c)        MC=AC

d)       MC>AC

   THE TURNING UP OF THE LONG RUN AVERAGE COST CURVE IS DUE TO THE

a)       TECHNICAL DIS ECONOMIES

b)       MANAGERIAL ECONOMIES

c)        MANAGERIAL DIS ECONOMIES

d)       TECHNICAL ECONOMIES

• WHICH OF THE FOLLOWING STATEMENTS ABOUT THE AC IS NOT TRUE:

a)       WHEN MC<ATC,ATC FALLS

b)       WHEN MC=ATC ATC IS CONSTANT

c)        WHEN MC > ATC,ATC RISES

d)       ATC IS NOT U SHAPED CURVE

   THE VERTICAL DISTANCE BETWEEN AVERAGE TOTAL COST CURVE AND AVC CURVE GOES ON AS OUTPUT LEVEL INCREASES

a)       INCREASING

b)       DECREASING

c)        SAME

d)       NONE OF THE ABOVE

   LONG RUN COST CURVES

1. IN THE LONG RUN ALL FACTORS OF PRODUCTION ARE VARIABLE AND THERE IS NO DISTINCTION OF FIXED AND VARIABLE COST. ALL COSTS ARE VARIABLE.THE LONG RUN COST SCHEDULE SHOWS FOR EACH LEVEL OF OUTPUT THE LOWEST POSSIBLE COST OF PRODUCING THE PARTICULAR OUTPUT
2. IT IS A PLANNING CURVE OR ENVELOPE CURVE AND IT IS A GUIDE TO THE ENTREPRENEUR IN HIS DECISION TO PLAN THE FURTHER EXPANSION OF OUTPUT.
3. LONG RUN AVERAGE COST IS EQUAL TO LONG RUN TOTAL COST DIVIDED BY THE LEVEL OF OUTPUT.
4. THE DERIVATION OF LONG RUN AVERAGE COST IS DONE FROM THE SHORT RUN AVERAGE COST CURVES. IN THE SHORT RUN PLANT IS FIXED AND EACH SHORT RUN COST CURVE CORRESPONDS TO A PARTICULAR PLANT.
5. PRODUCERS FIRST PLAN FOR SHORT PERIOD AND THEN A POINT WHERE THE SHORT RUN AVERAGE COST START RISING,HE INTRODUCES BETTER TECHNIQUE OF PRODUCTION,BETTER MACHINERY TO DERIVE MANY INTERNAL AND EXTERNAL ECONOMIES TO REDUCE THE SHORT RUN AVERAGE COST CURVE FOR THE SECOND PERIOD
6. LONG RUN AVERAGE COST REFERS TO MINIMUM POSSIBLE PER UNIT COST OF PRODUCING DIFFERENT QUANTITIES OF OUTPUT OF A GOOD IN THE LONG PERIOD. IT CAN MAKE USE OF DIFFERENT SIZES OF PLANTS.
7. LOWEST POSSIBLE AVERAGE COST OF PRODUCING A PARTICULAR AMOUNT OF OUTPUT WITH THE OPTIMUM PLANT SIZE AND THUS FACTOR COMBINATION FOR THAT PARTICULAR AMOUNT OF OUTPUT
8. EACH POINT ON THE LAC CORRESPOND TO A POINT ON SHORT RUN COST CURVES WHICH IS TANGENT TO THE LAC AT THAT POINT.

9. THE LONG RUN TOTAL COST IS THE MINIMUM COST AT WHICH THE LEVEL OF OUTPUT CAN BE PRODUCED BECAUSE IT HAS SUFFICIENT TIME TO SELECT THE OPTIMAL PLANT AND TO SELECT THE  LEAST COST FACTOR PROPORTION.LONG RUN COST IS LESS THAN STC.
10. START FROM THE ORIGIN
11. POSITIVE SLOPE
12. FIRST INCREASES AT DECREASING RATE AND THEN CONSTANT AND THEN INCREASE AT INCREASING RATE

• LONG RUN TOTAL COST CURVE
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13. LONG RUN ENVELOPS THE STC CURVE. IT REPRESENT THE LEAST COST OF DIFFERENT PLANTS. IT IS TANGENT TO ANY GIVEN POINT ON STC

   DIAGRAM

                           

   COST

                OUTPUT

   SHAPE OF THE AVERAGE COST CURVE

   IT IS U SHAPED

   WHY?

a)       ECONOMIES OF SCALE

b)       TECHNICAL ECONOMIES

c)        ECONOMIES OF INDIVISIBILITY

d)       DIS ECONOMIES OF SCALE

•BASED ON THE ASSUMPTION THAT EACH PLANT SIZE  IS DESIGNED TO PRODUCE OPTIMALLY A SINGLE LEVEL OF OUTPUT. ANY DEPARTURE FRO IT WILL LEAD TO INCREASED COST. EACH POINT OF THE LAC IS A POINT OF TANG ENCY WITH THE CORRESPONDING SAC

   RELATION BETWEEN LAC AND SAC

a)       SAC REPRESENT THE COSTS OF A SINGLE PLANT BUT LAC REPRESENTS THE AVERAGE COST OF DIFFERENT PLANTS.

b)       LAC CURVE LIKE SAC CURVE IS U SHAPED BUT IS RELATIVELY FLATTER.

c)        AT A GIVEN LEVEL OF OUTPUT IT CANNOT BE MORE THAN SAC

d)       LAC CURVE IS NOT TANGENT TO ALL BUT TO ONLY ONE AT THEIR MINIMUM POINT

e)       ANY POINT ABOVE THE LAC IS INEFFICIENT AS IT SHOWS HIGHER COST

f)        ANY POINT BELOW IS ECONOMICALLY DESIRABLE BECAUSE IT IMPLIES A LOWER UNIT COST BUT NOT ATTAINABLE

   RELATION

                                                      

                                                          

            

                                                                           

                         

   LONG RUN MARGINAL COST

   CHANGE IN THE TOTAL COST IN THE LONG RUN DUE TO THE PRODUCTION OF ONE MORE UNIT IS CALLED LONG RUN MARGINAL COST.  LMC CURVE CUTS LAC AT MINIMUM POINT. LMC CURVE IS FLATTER THAN SMC.

   LMC

                                     

                                                     

                             

                       

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