Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following is true about the long-run marginal cost curve?

1. It does not impact the supply curve

2. It rises alongside the average total cost

3. It remains the supply curve

4. It is completely horizontal

The correct answer is: It remains the supply curve

The long-run marginal cost curve is significant in determining the supply decisions in a perfectly competitive market. It intersects the long-run average total cost curve at its lowest point, which indicates the most efficient scale of production. The long-run marginal cost curve represents the additional cost incurred from producing one more unit of output when all factors of production are variable. When the price of the good is above the long-run marginal cost, firms can make an economic profit, leading to potential new firms entering the market. This process drives the long-run supply curve, as in a perfectly competitive market, firms will supply where the price equals the marginal cost, encouraging an increase in output until equilibrium is achieved. While it's true that marginal cost can vary as production scales, in the long run, as firms adjust to market conditions, the long-run marginal cost curve is indeed aligned with the long-run supply curve because it represents the lowest possible price at which firms are willing to supply additional units of output without incurring losses. Hence, the correct statement about the long-run marginal cost curve is that it effectively acts as the long-run supply curve under competitive market conditions.