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Production and cost — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsProduction and cost4 Marks
Question
Why does the difference between Average Total Cost and Average Variable Cost decrease with an increase in the level of output? Can these two be equal at some level of output? Explain.

OR

Why does difference between ATC and AVC decrease with increase in level of output? Explain.

✓

Answer

As, we know the difference between Average Total Cost and Average Variable Cost is average fixed cost (AFC = ATC - AVC) and AFC always decreases with the increase in output. It can be explained with the help of the following diagram and schedule.

It can be seen from the above diagram that there is a huge gap between AC and AVC with the starting of production. The gap between them decreases with the increase in production.

It is so because the gap between AC and AVC is AFC and AFC always decreases with the increase in production. The point to be remembered is that AVC can never touch AC curve because AFC cannot be Zero.

Units of Commodity
TFC
AFC
0
60
-
1
60
60
2
60
30
3
60
20
4
60
15
5
60
12

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