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Question

Why does the difference between Average Total Cost and Average Variable Cost decrease as the output is increased? Can these two be equal at some level of output? Explain.


Solution

Average Total Cost (ATC) minus Average Variable Cost (AVC) is equal to Average Fixed Cost (AFC). AFC = TFC / Output. Therefore, as output increases, AFC falls. So, the difference between ATC and AVC decreases with increase in output.

ATC and AVC can never be equal at any level of output as AFC can never be zero because TFC is positive.

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