The typical average cost curve in a competitive market is:
A) an upward-sloping straight line because fixed costs are constant, and variable costs are increasing with the level of output.
B) U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints.
C) downward-sloping until fixed costs are eliminated and then it becomes a horizontal line.
D) U-shaped because increasing quantities of output cause a decrease in fixed costs but an offsetting increase in variable costs.

Question

Quizplus · Accepted Answer

The U-shaped average cost curve in a competitive market reflects the fact that as a firm increases output, economies of scale initially lead to lower average total costs. However, there is a point at which the firm reaches maximum efficiency and further increases in output lead to diminishing marginal returns and increases in average total costs.

The Typical Average Cost Curve in a Competitive Market Is