A Level Economics AQA Practice Exam

What characterizes the L-Shaped Long Run Average Cost Curve at the beginning of production?

1. The cost per unit rises sharply

2. The cost per unit remains constant

3. The cost per unit falls rapidly due to economies of scale

4. The cost per unit fluctuates wildly

The correct answer is: The cost per unit falls rapidly due to economies of scale

The L-Shaped Long Run Average Cost (LRAC) Curve is characterized by an initial phase where the cost per unit falls rapidly due to economies of scale. Economies of scale occur when a firm increases production and, as a result, is able to spread fixed costs over a larger number of units, thereby reducing the average cost per unit. In this stage, firms often benefit from operational efficiencies, bulk purchasing of inputs, and improvements in technology that further contribute to lower average costs. As production increases and the firm approaches the minimum efficient scale, the curve characteristically shows a steep decline. This reflects the advantages gained from producing at higher levels, resulting in lower average total costs. The L-shape further indicates that beyond a certain point, average costs level off and stabilize, illustrating that there are limits to the cost advantages gained through scaling up production. The other potential answers do not accurately depict the behavior typical of the initial production phase on the L-Shaped LRAC curve. The emphasis on falling costs due to economies of scale is central to understanding why this option accurately characterizes the curve at the beginning of production.