Question

As the level of production increases in the short-run, the Average Variable Cost (AVC) (increases continuously/first decreases and then increases/decreases continuously) and the Average Fixed Cost (AFC) curve (increases continuously/first decreases and then increases/decreases continuously).

		A.  Decreases continuously; decreases continuously.
		B.  First decreases and then increases; decreases continuously.
		C.  Increases continuously; decreases continuously.
		D.  First decreases and then increases; increases continuously.
		E.  Increases continuously; first decreses and then increases.

Answer 1

Answer is B. First decreases and then increases: Decrease continously.

Explanation:

Average variable cost is determined on the principle that the law of increasing return applies to prooduction in the initial stages of production in short run and then constant return and then diminishing returns to scale applies.

This will result in decrease in Avearge variable cost when increasing returns applies and then AVC began to increase on application of diminishing returns.

However, whatever may be rate of returns to scale. The total production goes on increasing, this is the reason that Average fixed cost will go on decreasing continously.