Why is the long-run average cost curve called an envelope curve?

Accounting Dec 08, 2020

Expert Solution

Long run average cost curve (LRAC) is of U shape because of law of returns to scale. The long run average cost curve is called as an envelope curve because it wraps the entire short run average cost curve into it. All the points of the SRAC curve will be above or tangent to LRAC curve. The main reason behind this is that in the short run some factors are variable and some are fixed. On the other hand, in the long run all the factors are variable.

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