Q. 114.5( 2 Votes )
a) Why is Total V
Total Cost is the summation of Total Variable Cost and Total Fixed Cost. In the short run, the TFC is constant and parallel to the X-axis. The TFC is constant because the fixed cost does not change when there is an increase in output. The Total Variable Cost (TVC) is the cost incurred per unit of variable input employed. The TVC curve is an inverted S upward sloping curve. The main reason for the shape of the TVC curve is the operation of the law of variable proportion. As the total output increases, the TVC initially increases at a decreasing when the production is experiencing increasing returns. Consequently, as the production rises, the excessive use of the variable factor raises the cost in the stage of diminishing returns. This gives the TVC curve an inverted S-shape.
b) Total fixed cost (TCF) is the fixed cost for the production of output. TFC is constant because the fixed cost does not change when there is an increase in output. The Average Fixed Cost (AFC) is the fixed cost incurred per unit of output produced. It is the ratio between the total fixed cost and the number of units of output produced.
AFC = TFC/Q
The shape of the AFC curve is a rectangular hyperbola. Since the TFC is constant at all units of output, as output increases, the fixed cost gets spread over the units of output. When the same fixed cost is divided by increasing units of output, AFC declines. Thus as output increases, AFC diminishes. This gives the AFC curve the shape of a rectangular hyperbola.
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