Question

As output increases, ATC and AVC get closer to each other because?

1) The fixed costs decrease
2) The variable costs decrease
3) The average fixed costs decrease
4) The average variable costs decrease

Answer 1

As output increases, ATC and AVC get closer because the average fixed costs per unit decrease, as these costs are spread over more units of output.

Step-by-step explanation:

As output increases, the Average Total Cost (ATC) and Average Variable Cost (AVC) get closer to each other primarily because the average fixed costs decrease. Fixed costs are expenses that do not change with the level of output, such as rent or the purchase of equipment. As more units are produced, these fixed costs are spread over a larger number of units, reducing the average fixed cost per unit.

Variable costs, on the other hand, change with the level of production. Since ATC includes both fixed and variable costs, while AVC includes only variable costs, the gap between ATC and AVC narrows as the average fixed costs per unit diminish. Notably, it is not because the fixed costs themselves decrease, but because they are allocated over more units.