Final answer:
In situations where most costs are variable, learning curves are applied because variable costs change with production levels and can decrease as efficiency improves. Fixed costs do not change with production and are often sunk costs, while variable costs provide information about the firm's ability to cut costs and manage cost increases as production rises.
Step-by-step explanation:
In situations where most of the costs are variable, learning curves are more likely to be applied. This is because fixed costs, such as rent or salaried employees, do not change with the level of production and are therefore not relevant to the learning curve concept, which is based on the idea that per-unit production costs decline with increasing output due to improvements in efficiency and expertise. A learning curve is less relevant for sunk costs as well because they, like fixed costs, have already been incurred and cannot be recovered; thus, they bear no significance on future decision-making. Variable costs, however, do change with production levels and can decrease as workers become more skilled and efficient, exemplifying the effect of the learning curve.
When analyzing cost behaviors in the short run, there are distinct shapes associated with various cost curves. Fixed costs typically have a horizontal shape on a graph because they do not change with the level of output. Variable costs initially increase at a decreasing rate due to gains in productivity, but after a certain point, due to diminishing marginal returns, they start increasing at an increasing rate, which makes their curve take a U-shape. Marginal costs also tend to follow a U-shaped curve due to diminishing marginal returns, where the cost of producing one additional unit initially decreases and then increases after a certain level of production. Average total costs and average variable costs both decrease initially but may begin to increase once diminishing marginal returns set in, creating a U-shaped curve for these as well.
It is important for firms to understand that while fixed costs are often sunk costs and should not affect future economic decisions, variable costs can impart critical information for cutting costs and estimating how costs will rise with increased production.