Question

Draw average variable cost and average total cost curves. Do they intersect each other? Give one reason for your answer.

The difference between AC curve and AVC curve decreases with increase in output but the two curves never touch each other. Justify the statement with the help of diagram.

Answer 1

The average variable cost (AVC) and average total cost (ATC) curves are both U-shaped due to the law of variable proportions. AVC represents the variable cost per unit of output, while ATC includes both average variable cost and average fixed cost (AFC), i.e., ATC = AVC + AFC. These two curves do not intersect each other. This is because the ATC curve always lies above the AVC curve, as it includes the AFC component, which is always positive. Although the distance between the ATC and AVC curves becomes smaller with increasing output (since AFC decreases), the gap never becomes zero. Therefore, the AVC and ATC curves never meet or intersect.