Question

Which of the following curves is the curve shown in the figure? 

• A. Average variable cost curve
• B. Total variable cost curve
• C. Average fixed cost curve
• D. Average cost curve

Hint:

The average variable cost curve is U-shaped due to the initial economies of scale followed by the effects of diminishing returns.

Answer 1

The Correct Option is A

Step 1: Understanding the Graph:
The graph shown in the figure depicts the relationship between cost and output, showing a curve that starts high and declines as output increases, then begins to rise again after reaching a minimum point. This behavior is characteristic of the average variable cost (AVC) curve.
Step 2: Analysis of the Curves:
- Average variable cost (AVC) curve: This curve initially falls due to economies of scale (as output increases, average variable cost decreases) and then starts rising due to diminishing returns to labor and capital.
- Total variable cost curve (TVC): The total variable cost curve generally slopes upwards as output increases, but it does not exhibit the same U-shape as the AVC curve.
- Average fixed cost (AFC) curve: The AFC curve continuously declines as output increases, since fixed costs are spread over more units of output.
- Average cost curve: The average cost curve combines both fixed and variable costs, but it does not necessarily match the behavior depicted in the figure.
Step 3: Conclusion:
The curve shown in the figure most closely matches the shape of the average variable cost curve, making option (A) the correct answer.