The short-run average total cost curve is U-shaped because average fixed costs ________ and average variable costs ________ eventually as quantity produced increases.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

The U-shape of the short-run ATC curve is due to the fact that AFC decreases as output increases (because it gets spread over more units of output), while AVC eventually increases due to the law of diminishing marginal returns. Therefore, the overall shape is a result of the combination of these two opposing tendencies.

The Short-Run Average Total Cost Curve Is U-Shaped Because Average