Question

On a graph, draw all the following

a. The average fixed cost curve (AFC)

b. The average total cost curve (ATC)

c. The average Variable cost curve (AVC)

d. The marginal cost curve (MC)

EXPLAIN THE REASONING BEHIND THE SHAPE AND LOCATION OF EACH CURVE

Answer 1

The Average cost and average variable cost curves are U shaped because of application of law of returns to factor which ststes that as more and more variable inputs are employed along with the fixed factors, the total product first increases with an increasing rate, then at decreasing rate. The marginal product finally becomes negative.
The increasing rate stage pulls the average cost/average variable cost down and decreasing rate or MP becoming negative stage will take the AVC and ATC curve up.
The fixed costs are always constant. Average fixed cost is per unit fixed cost. So with an increase in output, the average fixed cost tends to fall continuously. MC cuts AVC and ATc at its minimum and rises faster than AC.