A firm’s average cost decreases in the long-run because of?

A. increasing returns to scale
B. diminishing average returns
C. decreasing marginal returns
D. decreasing average fixed cost

Correct Answer:

Option A – increasing returns to scale

Explanation

A firm’s average cost decreases in the long-run because of the law of increasing returns to scale. Law of increasing returns to scale shows that as output increases, the average cost fall. The law is applied to the long run analysis of production.