A Level Economics AQA Practice Exam

What is the shape of the long run average cost curve typically depicted as?

1. Flat

2. V-shaped

3. U-shaped

4. Linear

The correct answer is: U-shaped

The long run average cost curve is typically depicted as U-shaped due to the concept of economies and diseconomies of scale. Initially, as a firm increases production, it experiences economies of scale, which means that as output rises, the average cost per unit falls. This results in the downward-sloping portion of the U-shape. However, after a certain point, the firm may experience diseconomies of scale, where the average costs begin to rise as production increases further. This is often due to factors such as increased complexity in management, challenges in communication, or resource limitations that can arise in larger production scales. Consequently, this leads to the upward-sloping segment of the curve. The U-shape of the long run average cost curve effectively illustrates the relationship between output and average cost, capturing the varying efficiencies experienced by firms as they scale production up or down.