Indicate the correct code from the following types of the long run average cost curves on which the minimum average cost of production in long run can be determined:

(i) Long run average cost curve under normal production function

(ii) Long run average cost curve under linearly homogeneous production function

(iii) Planning curve

(iv) Envelope curve 

Choose the correct answer from the code given below :

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UGC NET Paper 2: Management 20th Dec 2018 Shift 2
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  1. Only (i), (ii) and (iii)
  2. Only (i), (ii) and (iv)
  3. Only (i), (iii) and (iv)
  4. Only (ii) and (iv)

Answer (Detailed Solution Below)

Option 3 : Only (i), (iii) and (iv)
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UGC NET Paper 1: Held on 21st August 2024 Shift 1
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Detailed Solution

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The correct answer is Only (i), (iii) and (iv)

Key Points

  •  A company's Long Run Average Cost or LRAC, curve shows the lowest average total cost at which it can produce any given amount of output over the long term (when all inputs are variable).​
  • The total cost over the long term is divided by the volume of output produced.
  • The LRAC is also known as the Planning curve.
  • The curve won't have a U-shape for a linearly homogenous production; rather, it will be straight or have only a small decrease in input functions.

  • As a result, it is impossible to determine the lowest average cost. In contrast, the curve will take a U-shaped shape in all other scenarios.

  • The short-run average total cost (ATC) curves for the firm are all contained in the LRAC, which can be regarded to be a "envelope".

Hence, the correct answer is (i), (iii) and (iv)

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