Final answer:
Average variable cost is calculated by dividing the variable cost by the total output at each level of production. It is typically U-shaped and can determine if a firm is earning profits.
Step-by-step explanation:
Average variable cost is calculated by dividing the variable cost by the total output at each level of production. For example, if the variable cost of producing 80 haircuts is $400, the average variable cost would be $400/80, which equals $5 per haircut.
The average variable cost curve is typically U-shaped, meaning it decreases initially and then increases as production increases.
If a firm's average variable cost of production is lower than the market price, the firm would be earning profits if fixed costs are not considered.