Question

The short-run average total cost curve
A) is U-shaped.
B) diminishes initially because average fixed costs increase.

C) increases eventually because of increasing returns.
D) All of the above answers are correct.

Answer 1

Option A.

• The short run average total cost curve is generally U shaped due to the diminishing marginal return's.
• This is because the average fixed costs initially decreases in as total fixed costs are spread over large number of units in short run.
• This curve eventually increases due to diminishing returns when the marginal cost increases which further increases the total average cost in the short run. Hence we get a U shaped short run average total cost curve.