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Question
What happens to the difference between Average Total Cost and Average Variable Cost as production is increased?
Solution
As output increases, the average total cost and average variable cost tend to fall and can never be equal for any level of output. The average fixed cost slopes downward to the right because AFC decreases as the output increases. It is a rectangular hyperbola curve. It means that the product of AFC and output is equal to TFC which remains constant at all levels of output. As the production reaches the highest level, ATC and AVC will become closer.
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