Question

Refer to Exhibit 7.3, which shows the U-shaped cost curves for a producer. A is the marginal cost curve, B is the average variable cost curve, and C is the average total cost curve. The vertical distance between lines B and C at any level of output represents _____

Answer 1

Answer:

U shaped Curves are all of the three : A marginal cost curve , B average variable cost curve , C average (total) cost curve

Vertical Distance between B) Average Variable Cost Curve , C) Average Total Cost Curve is Average Fixed Cost

Explanation:

Marginal Cost [MC] is addition to total cost, when an additional unit of output is produced. It is the rate of change in Total Cost. As total cost increases at decreasing rate first, then at increasing rate ; MC curve falls first & then rises & hence is U shape

Average Cost [AC] is average total cost per unit of output. It is also U shape as it falls first & then rises, due to total cost first increasing at decreasing rate & then increasing at increasing rate.

Total Cost [TC] changes only due to change in total variable cost [TVC] , as total fixed cost is constant. So, TVC changes in same pattern as TC, first at decreasing rate & then at increasing rate. This makes Average Variable cost [AVC] rise first, fall then i.e U shape

Total Cost is the total production expenditure on all (fixed & variable) factors of production.

TC = TFC (total fixed cost) + TVC

AC = AFC (average fixed cost) + AVC

AC - AVC = AFC. Difference between AC & AVC is AFC. This distance keeps on falling with increase in output but never becomes zero (the curves keep on coming closer but never intersect). Such because TFC is constant, AFC = TFC / Q keeps on falling with increase in output