The long-run average total cost curve indicates a relationship between which two variables?

The long-run average total cost curve illustrates the relationship between output and average total cost. This curve represents the lowest possible cost at which a firm can produce any given level of output when all inputs can be varied. In the long run, firms can adjust their production processes, allowing them to find the most efficient scale of production.

As output increases, the average total cost may decrease due to economies of scale, where spreading fixed costs over a larger number of units minimizes the average cost per unit. Conversely, as output continues to increase, a firm may face diseconomies of scale, where average total costs start to rise due to factors like increased complexity in management or input inefficiencies.

Understanding this relationship is critical for firms as they strategize on production levels and pricing in order to maximize profitability and compete effectively in the market. The long-run average total cost curve is essential for analyzing optimal production levels and making long-term investment decisions.