A firm average cost decreases in the longrun because?
Answer Details
A firm's average cost decreases in the long run due to increasing returns to scale.
This means that as the firm increases its production and expands its operations, it can benefit from economies of scale such as bulk purchasing, specialized equipment, and division of labor. These efficiencies can lead to lower average costs per unit of output, allowing the firm to be more competitive and potentially increase its profitability.
On the other hand, if the firm experienced diminishing average returns or decreasing marginal returns, it would experience higher average costs as it increased its production, making it less competitive and potentially leading to decreased profitability. Decreasing average fixed cost may also contribute to lower average costs, but it is not the primary driver of cost reductions in the long run.