Since all costs are variable in the long run, what do we expect to happen to average costs as firms grow larger over time? One way we might think of this is to ask ourselves whether large firms seem to have lower average costs than small firms. If so, we might expect the Long Run Average Cost (LRAC) curve to be downward sloping, if not, we might expect it to be upward sloping. In fact, there are several possibilities that we want to consider.

Keep in mind that all firms in an industry have access to the same technology; therefore, the LRAC curve is the same for all firms in a particular industry. This is important since we will consider the possibility that industry structure may be, at least in part, due to long run costs.

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