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Do AC and AVC intersects each other?

Do AC and AVC intersects each other?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Do AC and AVC intersect each other?** In economic theory, understanding the relationship between Average Cost (AC) and Average Variable Cost (AVC) is crucial for analyzing a firm's cost structure. Both AC and AVC are typically U-shaped curves that are examined in the context of production and cost analysis. **Graphical Analysis:** - **Average Variable Cost (AVC):** This curve represents the average cost of variable inputs used in production. Initially, AVC decreases as production increases due to increasing marginal returns. However, it eventually rises as diminishing marginal returns set in. - **Average Cost (AC):** Also known as Average Total Cost (ATC), this curve represents the total cost per unit of output, including both fixed and variable costs. Like AVC, the AC curve is typically U-shaped. **Intersection Point:** Though AVC and AC curves are distinct, they do not typically intersect. The AC curve always remains above the AVC curve since AC includes both fixed and variable costs, while AVC only accounts for variable costs. However, the distance between the AC and AVC curves diminishes as production increases, converging but not intersecting, due to the spreading effect of fixed costs over larger outputs. Understanding these curves helps businesses optimize production levels by minimizing costs, guiding decisions on resource allocation and pricing strategies.
Transcribed Image Text:**Do AC and AVC intersect each other?** In economic theory, understanding the relationship between Average Cost (AC) and Average Variable Cost (AVC) is crucial for analyzing a firm's cost structure. Both AC and AVC are typically U-shaped curves that are examined in the context of production and cost analysis. **Graphical Analysis:** - **Average Variable Cost (AVC):** This curve represents the average cost of variable inputs used in production. Initially, AVC decreases as production increases due to increasing marginal returns. However, it eventually rises as diminishing marginal returns set in. - **Average Cost (AC):** Also known as Average Total Cost (ATC), this curve represents the total cost per unit of output, including both fixed and variable costs. Like AVC, the AC curve is typically U-shaped. **Intersection Point:** Though AVC and AC curves are distinct, they do not typically intersect. The AC curve always remains above the AVC curve since AC includes both fixed and variable costs, while AVC only accounts for variable costs. However, the distance between the AC and AVC curves diminishes as production increases, converging but not intersecting, due to the spreading effect of fixed costs over larger outputs. Understanding these curves helps businesses optimize production levels by minimizing costs, guiding decisions on resource allocation and pricing strategies.
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# Average cost is the ratio of total cost and total quantity. 

Average variable cost is the ratio of total variable cost and total quantity. 

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