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The long-run average cost (LAC) curve is often called the 'planning curve' and the 'envelope curve' because it:
AIs tangent to each SAC curve, enveloping them below
BPasses through the minimum point of every SAC curve
CLies entirely above all short-run average cost curves
DIs a horizontal line independent of the output
Answer & Solution
Correct answer: A. Is tangent to each SAC curve, enveloping them below
1. The LAC is drawn tangent to a family of short-run average cost (SAC) curves.
2. Each point on the LAC touches some SAC curve, and the LAC supports them from below, giving the envelope shape.
3. Hence it is tangent to each SAC and envelops them from below.
4. The LAC is not tangent at SAC minima (A, only at the optimum point), it does not lie above the SACs (C), and it is U-shaped not horizontal (D). Hence option B.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.9–10_
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