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Question
Average cost curve of a firm is ________.
Average cost curve of a firm is ________.
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Solution
The correct option is D U - shaped
The U shape of the AC curve follows directly from the law of variable proportions. Initially there it too little of a variable input in comparison to the fixed input resulting in the underutilization of the fixed input. Thus as the quantity of variable input is initially increased, the fixed input is being better utilized, resulting in an increase in efficiency and thus the AC initially falls. However as more variable input is added beyond a point this leads to overcrowding and inefficiencies and thus it leads to falling productivity which leads to rising AC.
The U shape of the AC curve follows directly from the law of variable proportions. Initially there it too little of a variable input in comparison to the fixed input resulting in the underutilization of the fixed input. Thus as the quantity of variable input is initially increased, the fixed input is being better utilized, resulting in an increase in efficiency and thus the AC initially falls. However as more variable input is added beyond a point this leads to overcrowding and inefficiencies and thus it leads to falling productivity which leads to rising AC.
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