Question

Explain the graphical relationship between Total Fixed Cost, Total Variable Cost, and Total Cost.

Answer 1

ANSWER:

Fixed costs are costs which do not vary with output; and variable costs are those that do vary with output. The total cost is computed by adding total fixed and total variable costs. When output is zero, variable costs are also zero, however there will be fixed costs. When there is an increase in the output, the variable costs also start increasing, initially at diminishing rate, constant rate and then at an increasing rate. AVC is ‘U’ shaped due to the principle of variable Proportions which states the three phases of the curve.