Multiple Choice
An increase in the price of labor has no effect on which of the following cost curves?
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10. The Costs of Production
Cost-Minimizing Combination of Labor and Capital
Multiple Choice
Which of the following best describes the average variable cost (AVC) curve in the short run?
A
It is a straight, upward-sloping line because variable costs always increase at a constant rate.
B
It is typically U-shaped due to initially decreasing and then increasing marginal costs.
C
It is downward-sloping throughout because variable costs always decrease as output increases.
D
It is perfectly flat, indicating that variable costs do not change with output.
Verified step by step guidance1
Step 1: Understand the definition of Average Variable Cost (AVC). AVC is calculated as total variable cost divided by the quantity of output produced, expressed as \(\text{AVC} = \frac{\text{TVC}}{Q}\), where TVC is total variable cost and \(Q\) is output quantity.
Step 2: Recall that variable costs change with the level of output, typically increasing as more units are produced, but not always at a constant rate due to factors like diminishing marginal returns.
Step 3: Recognize that marginal cost (MC) initially decreases due to increasing marginal returns (e.g., better utilization of fixed inputs), then increases because of diminishing marginal returns, which affects the shape of the AVC curve.
Step 4: Understand that because AVC is influenced by marginal cost, the AVC curve tends to be U-shaped: it decreases at first when marginal costs are falling, reaches a minimum point, and then increases as marginal costs rise.
Step 5: Conclude that the AVC curve is not a straight line, not always downward-sloping, and not flat; instead, it is typically U-shaped in the short run due to the behavior of marginal costs.
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