The long-run average cost curve shows the cost of producing each quantity in the long run, when the firm can

choose its level of fixed costs and thus choose which short-run average costs it desires. If the firm plans to
produce in the long run at an output of Q3, it should make the set of investments that will lead it to locate on
SRAC3, which allows producing q3 at the lowest cost. A firm that intends to produce Q3 would be foolish to
choose the level of fixed costs at SRAC2 or SRAC4. At SRAC2 the level of fixed costs is too low for producing Q3 at
lowest possible cost, and producing q3 would require adding a very high level of variable costs and make the
average cost very high. At SRAC4, the level of fixed costs is too high for producing q3 at lowest possible cost, and
again average costs would be very high as a result.
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