Question

Average variable cost curve at first _______________.

• A. rises and then falls
• B. falls and then rises
• C. rises and continues to rise
• D. falls and continues to fall

Answer 1

Answer: (B)

falls and then rises

The U shape of the AVC 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 AVC initially falls. However as more variable input is added beyond a point this leads to overcrowding and inefficiencies an thus it leads to falling productivity which leads to rising AVC.