Question

explain what happens to AFC, AVC, ATC, and MC curves in the following two situations

I. fixed cost increases

ii. variable cost increases.

Answer 1

(i) when fixed cost increases, it increases the average fixed cost also. Hence, the total average cost also increases as shown in the diagram with upward shift of these curves. However, there is no change in terms of average variable cost or marginal cost since the increase in fixed cost is not associated with output level.

(ii) Whenn variable cost increases, average fixed cost curve does not change, where all other curves change. For example, increase in variable cost shifts the AVC curve upward and hence the AC curve upward as shown in the diagram below. Similarly, the MC curve also sifts up due to this. All these costs (VC, AVC, AC, MC) are associated with the level of output unlike fixed cost and average fixed cost.