Question

D Question 19 0.5 pts Average & Marginal Cost 120 100 MC 80 AC 60 AVC 40 20 AFC 0- Output Briefly, explain the reason(s) for thè shape of the above cost curves HTMLEditor A-IEE x x, E 12pt B I UA Paragraph T

Answer 1

MC : The Marginal Costs curve is u-shaped because of changes in the productivity of inputs of production. In most cases, an increase in the use of variable inputs (workers for example) lead to an increase in productivity when starting from a 'low' base and a decrease in productivity when starting from a 'high' base. this decrease in marginal productivity is the reason for such a shape of marginal cost curve.

AVC: It's a U-shaped curve. Initially, the variable cost per unit of output decreases as output increases. ... After the low, the variable cost per unit of output starts to increase. The increase in AVC after a certain point is indirectly related to the law of diminishing marginal returns. thus the AVC cuts MC at it minimum. after that it rises again giving a U shape

ATC/AC : The main reason for this 'U' shaped AC curve is the operation of the law of variable proportion. We know as output increases, law of increasing return operates in the initial stages. At this stage, when a firm increases its output, it gets economies and the result is decline in Average Cost. thus the AC cuts MC at it minimum. after that it rises again giving a U shape. it is somewhat similar to AVC conceptually.

AFC: The average fixed costs AFC curve is downward sloping because fixed costs are distributed over a larger volume when the quantity produced increases. AFC is equal to the vertical difference between ATC and AVC.

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