Why AC curve is 'U'shaped? - Vidyadip

Question

Why AC curve is 'U'shaped?

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Answer

The main reason for this 'U' shaped AC curve is the operation of the law of variable proportion. We know as output increases, law of increasing return operates in the initial stages.
At this stage, when a firm increases its output, it gets economies and the result is decline in Average Cost. After the point of optimum combination, economies turn into diseconomies and result in increase in output and Average Cost. This is the stage of law of diminishing returns.

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