Chapter 17: Problem 641

Explain why the average fixed cost curve (AFC) slopes downward throughout, while the average variable cost curve (AVC) slopes down at first, but then turns upward.

Short Answer

Expert verified

The average fixed cost (AFC) curve slopes downward throughout because fixed costs are spread over a greater number of produced units as production increases. The average variable cost (AVC) curve initially slopes downward due to increased efficiency and lower variable costs per unit; however, it turns upward as the law of diminishing marginal returns comes into effect, leading to decreased efficiency and increased variable costs per unit.

Step by step solution

Understand fixed and variable costs

Fixed costs are costs that do not change with the level of production, such as rent, salaries, and equipment costs. Variable costs are costs that change with the level of production, such as raw materials and labor expenses.

Define Average Fixed Cost (AFC)

Average Fixed Cost (AFC) refers to the fixed costs of production divided by the quantity produced. Mathematically, it can be expressed as: AFC = \( \frac{Fixed\, Costs}{Quantity\, Produced} \)

Define Average Variable Cost (AVC)

Average Variable Cost (AVC) refers to the variable costs of production divided by the quantity produced. Mathematically, it can be expressed as: AVC = \( \frac{Variable\, Costs}{Quantity\, Produced} \)

Explain the downward-sloping AFC curve

The average fixed cost (AFC) curve slopes downward throughout because as production increases, the fixed costs, which do not change, are spread over a greater number of units. Consequently, AFC decreases as the number of units produced increases.

Understand the law of diminishing marginal returns

The law of diminishing marginal returns states that as more of a variable input is added to production, the marginal product initially increases, but beyond a certain point, the marginal product of each additional input begins to decrease.

Describe the behavior of the AVC curve

The average variable cost (AVC) curve initially slopes downward because adding more inputs in production can lead to increased efficiency and lower variable costs per unit. However, as more inputs are added, the law of diminishing marginal returns comes into effect, leading to a decrease in efficiency and increased variable costs per unit. As a result, the AVC curve will eventually slope upward. Overall, the average fixed cost (AFC) curve slopes downward throughout due to spreading fixed costs over more units produced, while the average variable cost (AVC) curve initially slopes downward and then turns upward due to the law of diminishing marginal returns affecting variable costs.

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