A U-shaped long-run average cost curve is based on the assumptions that:
(A) Greater division of labour and specialization accrue to larger firms
(B) Minimum cost of production at various levels of output
(C) Economies of scale prevail at small levels of output
(D) It becomes more difficult to manage the firm effectively as it grows bigger
(E) Diseconomies of scale prevail at larger level of output
Choose the correct answer from the options given below:

Correct option is D

• (A) Greater division of labour and specialization accrue to larger firms: This is correct. Larger firms can benefit from a higher division of labor and specialization, leading to more efficient production and reduced costs.

• (B) Minimum cost of production at various levels of output: This is incorrect. The U-shaped long-run average cost (LRAC) curve represents the minimum cost of production at each level of output. The statement that minimum cost of production occurs at various levels is misleading since the LRAC curve shows the minimum cost for a specific level of output, not at various levels.

• (C) Economies of scale prevail at small levels of output: This is correct. In the early stages of production, economies of scale occur as firms increase output. These economies lead to lower average costs due to better resource utilization, more specialization, and efficiencies.

• (D) It becomes more difficult to manage the firm effectively as it grows bigger: This is correct. As firms increase in size, they often face difficulties in management, coordination, and communication, leading to inefficiencies (diseconomies of scale).

• (E) Diseconomies of scale prevail at larger level of output: This is correct. After a certain level of output, firms start to experience diseconomies of scale, where average costs increase due to inefficiencies from over-expansion.

Hence, the correct answer is (A), (C), (D), and (E) only.

Information Booster:

The U-shaped long-run average cost curve reflects economies of scale initially, followed by diseconomies of scale as output increases.

• Economies of scale help reduce cost per unit as output increases at the early stages.
• Diseconomies of scale set in after a certain output level, as larger firms face management and coordination issues that increase costs.
• The minimum cost occurs at the lowest point of the LRAC curve, where firms operate most efficiently.

Additional Information:

(B) Minimum cost of production at various levels of output: This statement is not accurate. The LRAC curve shows the minimum cost of production at each output level. It's not correct to say that minimum cost occurs "at various levels." The point at which the cost is minimized for a specific output is the most efficient level, not something that applies generally across all output levels.​