Question

Explain the shape of the average cost curve (or average variable cost curve).

Answer 1

The U-shaped average cost (or marginal cost) curve indicates that the curve declines initially (up to the OA level of output) and then rises afterward.
This U-shape of the AC (or MC) curve in the short run is explained by the law of variable proportions.
In the early stages of production, the curve slopes downward because of increasing returns to the variable factor.
After a certain point, the curve begins to slope upward due to decreasing returns to the variable factor.