A firm’s average cost decreases in the long-run because of
-
increasing returns to scale
- diminishing average returns
- decreasing average fixed cost
- decreasing marginal returns
The correct answer is: A
Explanation
Increasing returns to scale occur when a firm increases its inputs (such as labor and capital) in the production process, resulting in a more than proportionate increase in output. As a result, the firm experiences economies of scale, leading t a decrease in average cost. When the firm can produce more output with the same or lower cost per unit, the average cost decreases.