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Chapter 11: Problem 2

As the level of output increases, what happens to the difference between the value of average total cost and the value of average variable cost?

Short Answer

Expert verified
As the level of output increases, the difference between the value of average total cost and the value of average variable cost decreases.

Step by step solution

01

Understand the definitions

ATC is the total cost divided by the quantity produced and AVC is the variable cost divided by quantity produced. The difference between ATC and AVC is Average Fixed Cost (AFC).
02

Recognize how fixed and variable costs respond to output

Variable costs change with the level of production, increasing as more units are produced. In contrast, fixed costs do not change based on production levels. They remain constant regardless of the number of units produced.
03

Apply the reasoning to the problem

As output increases, since variable costs increase but fixed costs remain the same, the value of ATC decreases due to the effect of spreading fixed costs over more units. Therefore, the difference between ATC and AVC also decreases, as more of the total cost becomes variable cost and less becomes fixed cost.

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Most popular questions from this chapter

A writer for the Wall Street Journal, discussing the relatively poor performance of \(\mathrm{HSBC},\) a global bank with headquarters in the United Kingdom, noted, " [The poor performance] is further reason to ask whether the structure of such a large, global bank is working against it.... There remains a legitimate question whether the group is too big to manage." After reading this article, a student remarks: "It seems that the firm is suffering from diminishing returns." Briefly explain whether you agree with this remark.

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