Which curve is typically U-shaped due to the law of variable proportions?
Show answer & explanation
Correct answer: B
Explanation
Answer: Average Variable Cost Curve
Explanation: The Average Variable Cost (AVC) curve is typically U-shaped due to the Law of Variable Proportions. Initially, as more variable factors (like labor) are employed with fixed factors, efficiency increases, leading to a fall in AVC. After a certain point, diminishing returns set in, causing AVC to rise, which gives the curve its U-shape.
Additional Key Points:
The Law of Variable Proportions operates in the short run when at least one factor is fixed.
AVC = Total Variable Cost / Output.
The Average Fixed Cost (AFC) curve is downward sloping, not U-shaped.
The Marginal Cost (MC) curve also becomes U-shaped and intersects AVC at its minimum point.
The initial downward slope reflects better utilization of fixed factors, while the upward slope reflects inefficiency due to overcrowding or overuse.
Potential Exam-Oriented Questions & Answers:
Question: Which cost curve intersects the AVC curve at its minimum point?
Answer: Marginal Cost (MC)
Question: What is the formula for Average Variable Cost?
Answer: AVC = TVC / Output