The U-shape of the long-run average total cost (LRATC) curve results from which of the following?

• A. Increasing marginal returns to labor
• B. Constant returns to scale
• C. Economies and diseconomies of scale
• D. The law of diminishing marginal utility

Answer: (C)

Verified step by step guidance

1. Understand that the Long-Run Average Total Cost (LRATC) curve shows the lowest possible cost per unit of output when all inputs are variable.
2. Recognize that the U-shape of the LRATC curve is explained by economies and diseconomies of scale, which describe how costs change as the scale of production changes.
3. Economies of scale occur when increasing production leads to lower average costs due to factors like specialization and more efficient use of resources.
4. Diseconomies of scale happen when further increasing production causes average costs to rise, often due to management difficulties or resource limitations.
5. Therefore, the LRATC curve initially slopes downward due to economies of scale and then slopes upward due to diseconomies of scale, creating the characteristic U-shape.