Question
Why is AC curve U-shaped in short run?
OR
Why is AC curve U-shaped?
OR
Why is AC curve U-shaped?
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Answer
Average cost is U-Shaped because of Law of variable proportion:
- The shape of average cost (AC) depends upon total cost (TC).
- Initially, total cost (TC) increases at a diminishing rate (Total Product increases at Increasing rate), which makes its average, i.e., average cost (AC) to fall, then reaches its minimum point.
- Thereafter, total cost (TC) increases at increasing rate (Total Product increases at diminishing rate), which makes the average cost (AC) to rise. This type of production behaviour shows operation of law of variable proportion.
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Price (Rs)
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$SS_1$ (units)
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0
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8
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0
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Units of Labour
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(Q) Average Product (Units)
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Marginal Products (Units)
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1
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8
|
-
|
|
2
|
10
|
-
|
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3
|
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10
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4
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9
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5
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4
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6
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7
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