Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How does the long-run supply curve behave?

1. It is always upward sloping

2. It can remain horizontal at the lowest average cost

3. The marginal cost curve may no longer be upward sloping

4. It is identical to the short-run supply curve

The correct answer is: The marginal cost curve may no longer be upward sloping

The long-run supply curve displays unique characteristics influenced by the concept of marginal costs, economies of scale, and the entry and exit of firms in a perfectly competitive market. The correct choice addresses an essential aspect of this behavior. In the long run, firms have the opportunity to adjust all inputs, which means that the marginal cost curve can change based on the firm's scale of production and the costs associated with it. If economies of scale are significant, the marginal cost curve may not continue to slope upwards indefinitely, and its behavior can depend on the level of output and the technology in use. This allows firms to operate at lower marginal costs as they increase production, which can sustain a horizontal long-run supply curve at the lowest average cost if they optimize their production levels. This characteristic of the long-run supply curve reflects a more flexible response to changes in market conditions compared to the short-run scenario, where some factors of production are fixed. Thus, understanding the dynamics of the long-run supply curve is crucial for interpreting market behaviors over time, particularly in competitive industries. The other options might misrepresent the nature of the long-run supply curve or its relationship to short-run factors. For example, while it is true that in many competitive markets the long-run supply curve can be