Question

3.         Explain why average total cost and average variable cost tend to get closer as output increases. Will the curves ever meet? Why or why not?

Answer 1

• Average total cost is the sum of the average fixed costs and the average variable costs.
• Average fixed costs are those costs that are incurred by a firm when then production output is zero and it remains fixed throughout the production.
• While the average variable costs are those costs that are incurred when production increases and it remains variable.
• As we know that average total cost contains both fixed costs and variable cost and it is the total cost Incurred by a firm when production Increases, both average total cost and average variable cost curves tend to get closer as output increases.
• This is mainly because fixed costs tends to become zero at this point where production Increases and average variable costs Increases when production increases.
• This causes the the ATC curve to take a U shape, which is derived from the shape of AVC curve.
• AVC curve then lies close below the ATC curve but they never meet each other because of the diminishing returns of variable factor.
• This means that when more variable factors are added output Increases but, more and more variable factors will bring smaller and smaller Increase in output which will finally decrease the overall production.