Describe the relationship between average variable cost and average total cost. How are the general shapes...

Describe the relationship between average variable cost and average total cost. How are the general shapes of the AVC and ATC curves related?

Expert Solution

Answer :-

Average total cost (ATC) can be defined as the total cost per unit of output.

It is to be noted that the total is the sum total fixed cost(TFC) and total variable cost(TVC).

If we assume that the the total quantity be Q, then mathematically,

ATC = TC/Q = (TFC+TVC)/Q and,

The average variable cost is defined as the total variable cost per unit of output.

AVC = TVC/Q

If the total fixed is zero then ATC will be equal to AVC.

The shape of the ATC curve combines the shapes of the AFC and AVC curves. The total cost curve is U shaped curve. The U-shape arise from the influence of two opposing forces which are discussed below ;

(1). Spreading total fixed cost over a larger output:

Its average fixed cost decreases, AFC curve is downward sloping.

(2).Eventually diminishing returns:

It means that the output increases, ever-larger amount of labour are needed to produce an additional unit of output. If output is increasing, average variable cost decreases initially but eventually increases and the AVC curve slopes upward.

Rahul Sunny answered 9 months ago

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