Question

Using graphs, show why a firm's short-run average cost curve is U shaped (This involves at least two graphs)

Answer 1

Ans: The short run cost curves AC and AVC are U shaped because of the law of variable proportions. According to this law, in the initial sages of production, as the firm combines its fixed and variable factors to begin with, to produce more and more of output, the productivity of the variable factors increases, and per unit costs falls.

Then, they reach the stage of minimum costs at the level of optimum combination of fixed and variable factor. Thereafter, as the use of variable input increases given the fixed factor to increase the output, the productivity of variable factor fall, resulting in rise in per unit costs.