Chapter 8: Production Costs: Where Less Is More where q is the quantity of output produced.
Marginal cost always intersects the minimum point on the average total cost curve. Thus, average total cost initially decreases, and then begins to increase, resulting in a U-shaped curve. Average total cost has two components — average fixed cost and average variable cost. As an equation,
Average fixed cost Average fixed cost (AFC) is fixed cost per unit of output and is determined by dividing total fixed cost by the quantity of output. In the total cost equation
total fixed cost is $5,600, so averaged fixed cost is
Because the numerator of average fixed cost is a constant, while the denominator is the quantity of output produced, average fixed cost always decreases as the quantity of output produced increases.
Average variable cost Average variable cost (AVC) represents variable cost per unit of output and equals total variable cost divided by the quantity of output. Given total variable cost equals
average variable cost equals
Typically, average variable cost initially decreases, and then begins to increase, resulting in a U-shaped curve. Marginal cost intersects the minimum point on the average variable cost curve.
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