Which of the following cost curves is represented by a graph that decreases and then increases as the level of output increases?

Question

Total fixed cost

Total variable cost

Average variable cost

Average fixed cost

Answer 1

The cost curve that typically decreases and then increases as the level of output increases is the Average Variable Cost (AVC) curve.

Initially, as production increases, AVC tends to decrease due to economies of scale, where spreading fixed costs over a larger output leads to lower average costs. However, after reaching a certain level of output, AVC starts to increase due to the law of diminishing returns, where adding more variable inputs results in less efficient production.