What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?

• A. A downward-sloping long-run average cost curve
• B. A U-shaped long-run average cost curve
• C. An upward-sloping long-run average cost curve
• D. A horizontal long-run average cost curve

Answer: (A)

Long-run average cost shows how average cost changes as a firm changes all its inputs and scales up production. When you expand output, average cost can fall because costs are spread over more units (economies of scale). As output grows further, there can be a range where average cost doesn’t change much (constant returns to scale). If you push output even more, coordination problems or inefficiencies can cause average cost to rise (diseconomies of scale). Taken together, these three phases produce a U-shaped long-run average cost curve: it slopes downward first, then levels off, then rises. The other shapes would either imply only one phase (continuous economies, only constant returns, or only diseconomies) and miss the full picture.