What is the shape of average cost curve? Provide the reason for that particular shape.
What will be an ideal response?
Average cost curve is roughly “U” shaped.
It has two reasons. Average cost includes average fixed costs and average variable costs. The first reason pertains to the fixed cost as fixed costs are divided over more products when production expands average cost falls. The second reason relates to changing input proportions. As the firm increases the quantity of one input while keeping other inputs constant, the law of diminishing marginal returns tells us that MPP will first rise. As a result, average costs will decrease. Average cost will increase when the size of the firm increases.
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