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When a firm’s long-run average cost curve is horizontal for a range of output,
then that range of production displays
constant average fixed costs.
constant returns to scale.
decreasing returns to scale.

Ask by Lee Marsh. in the United States
Mar 28,2025

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Answer

When a firm’s long-run average cost curve is horizontal for a range of output, that range of production displays constant returns to scale.

Solution

The long-run average cost (LRAC) curve shows the minimum cost per unit at different output levels when all inputs can be varied. A horizontal LRAC curve means that the average cost, denoted by , remains constant over a range of outputs. This situation implies that when the firm doubles its inputs, its output also doubles, keeping the ratio of input to output constant. In other words, the firm is experiencing constant returns to scale.
Thus, the correct answer is:
.

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When a firm’s long-run average cost curve is horizontal for a range of output, it indicates a region where the firm is experiencing constant returns to scale. This means that as the firm increases production, its average costs remain the same, allowing for efficient scaling without increasing costs. It’s like baking cookies—if you can make two batches in the same time it takes to make one, your average cost per cookie doesn’t change!
In the realm of real-world application, businesses often look for this sweet spot of production efficiency where scale doesn’t compromise quality or price. Industries like automotive manufacturing or large-scale food production strive to operate within this range, maximizing output while keeping costs stable. It’s a balancing act that can lead to significant competitive advantages!

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