What does the long-run average total cost (LRATC) curve show?

• A. The lowest possible average total cost at which any output level can be produced when all inputs are variable.
• B. The marginal cost of producing one more unit of output in the short run.
• C. The average total cost of production when at least one input is fixed.
• D. The total fixed cost divided by the quantity of output produced.

Answer: (A)

Verified step by step guidance

1. Understand that the Long-Run Average Total Cost (LRATC) curve represents the cost per unit of output when a firm can vary all inputs, meaning there are no fixed inputs in the long run.
2. Recognize that the LRATC curve is derived from the envelope of all possible short-run average total cost (SRATC) curves, each corresponding to a different scale of fixed inputs.
3. Interpret the LRATC curve as showing the lowest possible average total cost for producing each level of output when the firm can adjust all factors of production optimally.
4. Distinguish the LRATC from short-run cost concepts: it is not about marginal cost or average total cost with fixed inputs, but about the minimum average cost achievable when all inputs are variable.
5. Conclude that the LRATC curve illustrates economies and diseconomies of scale by showing how average costs change as output expands with full input flexibility.