Question

During constant returns to a factor, what will be the shape of AC and AVC curves?

Answer 1

take for example why is AC a u shaped curve... start by giving a diagram... then..
1. initially there will be increasing returns to a factor , here marginal product will increase, marginal cost will decrease leading to a decrease in average cost (AC) .
2. then there will be constant returns to a factor , here marginal product will be constant and marginal cost will be contant and thus average cost will also be constant.
3. then there will be diminishing returns to a factor , here marginal product will decline, marginal cost will increase and thus average cost will increase.
we know that AC= AVC+AFC here afc is average fixed costs and avc is average variable costs and as output increases the influence of afc on ac will reduce and the influence of avc on ac will increase and thus avc will pull ac upwards and make ac a U shaped curve. this is in accordance with law of variable proportions.