Answer to Question #223198 in Economics of Enterprise for Cebo

Question

Discuss the relationship between the three short-run total cost curves. Use a diagram to motivate your answer. (15 MARKS)

Answer 1

Solution:

The three short-run total cost curves are:

·        Average Total Cost (ATC) curve.

·        Average Variable Cost (AVC) curve.

·        Average Fixed Cost (AFC) curve.

 

The average total cost is the sum of the average variable cost and the average fixed costs. That is,

ATC = AFC + AVC

The behavior of the ATC curve depends upon that of the AVC and AFC curves. The following are the relationship observations:

· In the beginning, both AVC and AFC curves fall. Thus, the ATC curve falls as well.

· Next, the AVC curve starts rising, but the AFC curve is still falling. Hence, the ATC curve continues to fall. This is because, during this phase, the fall in the AFC curve is greater than the rise in the AVC curve.

· As the output rises further, the AVC curve rises sharply. This offset the fall in the AFC curve. Thus, the ATC curve falls initially and then rises.

This is displayed by the below graph: