Questions and Answers
What happens to average fixed cost curves as output increases?
Average fixed cost curves fall as output increases because fixed costs represent a decreasing proportion of the total cost.
What is the behavior of average total cost as output changes?
Average total cost falls at first then rises due to the law of diminishing returns.
What occurs to average variable cost with changes in output?
Average variable cost falls at first then rises due to the law of diminishing average returns.
How does the marginal cost curve behave as output increases?
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The vertical distance between Average Cost (AC) and Average Variable Cost (AVC) is equal to Average Fixed Cost (AFC).
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Study Notes
Average Cost Curve Understanding
- Average fixed cost (AFC) decreases as output increases since fixed costs become a smaller fraction of total costs.
- Average total cost (ATC) initially decreases as production expands, then increases due to the law of diminishing returns, which highlights the inefficiency of resources at higher output levels.
- Average variable cost (AVC) declines at lower output levels but starts rising due to the law of diminishing average returns, indicating reduced efficiency with additional production.
- Marginal cost (MC) initially experiences a decline as production increases but eventually rises, reflecting diminishing marginal returns. This concept illustrates that each additional unit of output requires increasingly more input.
- The vertical distance between average cost (AC) and average variable cost (AVC) represents average fixed cost (AFC).
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Description
This quiz explores the concepts of average fixed cost, average total cost, average variable cost, and marginal cost. It delves into how these costs change with varying levels of production and illustrates the law of diminishing returns. Test your knowledge on the relationships and implications of these economic principles.
