What distinguishes the long-run average cost curve from the short-run average cost curve?

• A. LRAC is always U-shaped
• B. In the long run, all inputs are variable and firms can adjust plant size
• C. LRAC ignores fixed costs
• D. LRAC is independent of scale

Answer: (B)

In the long run, all inputs are variable, so a firm can choose the plant size that minimizes average cost for each level of output. The long-run average cost curve shows that minimum cost for each output after selecting the best scale, making it the envelope of the short-run curves corresponding to different plant sizes. This captures how cost per unit can fall with more efficient, larger plants (economies of scale) or rise if a plant becomes too large (diseconomies of scale). Because of that, the long-run curve isn’t fixed to a single shape or tied to fixed inputs, and it depends on the optimal scale at each output. In the short run, with at least one input fixed, average costs typically exhibit a U-shape due to diminishing returns within a fixed plant.