In the general textbook treatment, the firm's short run average variable and average total cost curves are U-shaped, while the average fixed cost curve is downward sloping over the entire range of output. Explain why
What will be an ideal response?
The U-shaped AVC and ATC curves reflect the effects of diminishing marginal returns. When a firm incurs diminishing returns, marginal costs increase. So long as marginal cost is less than average total cost and average variable cost, they will decrease. However, when marginal costs rise above average total and average variable costs, the average costs must necessarily increase. In contrast, when calculating average fixed cost, total fixed cost is being spread over an increasingly larger amount of output. As this happens, the average cost per unit decreases.
You might also like to view...
Over the past decade technological improvements that have lowered the cost of producing an automobile have increased
A) both the supply and the demand for automobiles. B) the supply but not the demand for automobiles. C) the demand but not the supply of automobiles. D) neither the supply nor the demand for automobiles.
It may be argued that theoretically, international capital movements
A) tend to hurt labor in donor countries. B) tend to hurt the donor countries. C) tend to hurt the recipient countries. D) tend to hurt labor in recipient countries. E) increase future production in donor countries.