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Empirical studies of modern firms suggest the long-run average cost curve is often 'L-shaped' rather than 'U-shaped'. The L-shape implies that:
ACosts rise sharply soon after production begins
BLAC stays low at large output as scale economies persist
CLAC is constant at every single level of output
DDiseconomies of scale dominate from the first unit
Answer & Solution
Correct answer: B. LAC stays low at large output as scale economies persist
1. The traditional U-shaped LAC assumes constant technology, but technology changes over the long run.
2. The L-shaped curve shows LAC falling rapidly at first due to economies of scale.
3. It then stays low rather than turning up, because the firm continues to enjoy economies of scale at large output.
4. Costs do not rise soon (A), the curve is not flat throughout (C), and diseconomies do not dominate from the start (D). Hence option B.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.11–12_
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