Question

Draw average variable cost curve.

Hint:

The AVC curve helps firms understand their cost structure and is important in determining the optimal level of production in the short run.

Answer 1

The Average Variable Cost (AVC) curve shows the per-unit variable costs at different levels of output. It is derived by dividing the total variable cost (TVC) by the quantity of output produced. The AVC curve typically has a U-shape, initially decreasing due to increasing returns to the variable factor, and later increasing as the law of diminishing marginal returns sets in.
Step 1: Characteristics of the AVC Curve.
- Initially, as more units of the variable input are added, the average variable cost declines. This is because of economies of scale and better utilization of variable inputs. - After a certain point, the AVC starts rising due to the law of diminishing returns. As the firm hires more variable inputs, the added costs become higher because fixed resources (such as machinery) are increasingly stretched.

Step 2: U-Shaped Curve.
The AVC curve is U-shaped because, at first, the additional output produced by the variable inputs lowers the average cost. But as more input is added, the marginal productivity of the variable input declines, causing the average variable cost to rise.