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The LAC curve is tangent to the minimum point of a short-run average cost curve at only one output level. At this optimum output, the relevant short-run plant is operated:
AAt less than its full capacity
BBeyond its full capacity
CAt its minimum average cost (optimum capacity)
DAt a point where its average cost is rising
Answer & Solution
Correct answer: C. At its minimum average cost (optimum capacity)
1. While the LAC declines it is tangent to the falling parts of SAC curves, and while it rises it is tangent to their rising parts.
2. Only at the lowest point of the LAC does tangency coincide with the minimum point of a SAC.
3. There the plant is operated exactly at its optimum (minimum average cost) capacity.
4. Less than full capacity (A) occurs for outputs below the optimum, beyond full capacity (B) for outputs above it, and rising AC (D) is not the minimum. Hence optimum capacity.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.10_
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