Final answer:
The difference between ATC and AVC declines as production increases due to the spreading of fixed costs over more units and the impacts of diminishing marginal productivity. This also relates to where MC intersects the ATC, as well as the effects of technological advancements and wage changes on production costs.
Step-by-step explanation:
The question asks about the relationship between Average Total Cost (ATC) and Average Variable Cost (AVC) as production increases. Specifically, it states that the difference between the ATC and AVC curves will decline as production increases. This difference is essentially the Average Fixed Cost (AFC), as ATC is the sum of AVC and AFC.
As production increases, the fixed costs are spread over more units, causing the AFC to decrease and making the ATC approach AVC. This phenomenon is based on the concept of diminishing marginal productivity, which holds that as a firm employs more labor, the additional output produced will eventually decline. The reduction in the ATC-AVC gap is also affected by where the Marginal Cost (MC) curve intersects the ATC curve. Technological improvements and changes in wages can also influence the costs of production and the position of these curves.