The point of tangency between the short-run average total cost (SRATC) curve and the long-run average cost (LRAC) curve occurs Select one: a. at a point where both the average total cost and the marginal cost are rising. b. at the point of minimum SRATC. c. only when the LRAC curve is at its minimum. d. at a point where average total cost is falling but the marginal cost is rising. e. at an output level for which the quantity of the fixed factor is optimal.
The Correct Answer and Explanation is:
The correct answer is e. at an output level for which the quantity of the fixed factor is optimal.
Explanation:
The point of tangency between the Short-Run Average Total Cost (SRATC) curve and the Long-Run Average Cost (LRAC) curve occurs when the firm is in a situation where it has minimized costs for the given level of output, considering both the fixed and variable factors of production. This is where the firm has adjusted its fixed inputs optimally, and is operating at the lowest possible cost for the production level.
In the long run, all factors of production (including capital and labor) are variable, meaning the firm can adjust its inputs in response to changes in output levels. In contrast, the short run involves at least one fixed factor of production (such as plant size or equipment), meaning that only certain inputs can be adjusted.
When the SRATC curve touches the LRAC curve, it means that the firm is at an output level where the fixed factors (like machinery or factory size) are optimally chosen for that level of production. Any increase or decrease in output would require the firm to adjust its fixed input levels, and therefore, it would move along the LRAC curve, reflecting the firm’s ability to optimize all its factors in the long run.
- At the point of tangency, the firm is neither over-utilizing nor under-utilizing its fixed inputs. This optimally balances fixed costs with variable costs to achieve the lowest possible cost at that level of output, meaning the firm is not experiencing diseconomies of scale or inefficiency.
Thus, e. at an output level for which the quantity of the fixed factor is optimal is the most accurate description of the point of tangency.
