A firm's average cost decreases in the long-run because of

Step 1: Analyze the question The question asks why a firm's long-run average cost falls. The key phrase is "long-run," meaning all factors of production are variable and there are no fixed costs.

Step 2: Explain the concept In the long run, a firm can change the scale of production. When it expands, it may enjoy economies of scale, which means the cost per unit falls as output rises. This happens when the firm experiences increasing returns to scale: doubling all inputs more than doubles output. This produces the downward-sloping part of the long-run average cost (LRAC) curve.

Step 3: Check each option

• A. Increasing returns to scale: Correct. Output rises proportionally more than inputs, so the average cost per unit falls in the long run.
• B. Diminishing average returns: Wrong. Diminishing returns are a short-run idea (at least one factor is fixed). They cause average cost to rise, not fall.
• C. Decreasing average fixed cost: Tempting, but wrong. Average fixed cost falls as output rises, but this is a short-run concept. In the long run there are no fixed costs.
• D. Decreasing marginal returns: Wrong. This is also a short-run law, and it pushes costs up, not down.

Step 4: Answer The correct option is A. increasing returns to scale.

Step 5: Exam tip Link the time period to the concept:

• Short run → law of diminishing returns, fixed costs, AFC
• Long run → returns to scale, economies and diseconomies of scale

When you see "long-run" in a cost question, think returns to scale / economies of scale first. Options mentioning "fixed" or "diminishing/marginal returns" usually belong to the short run.