question_answer

What is the behaviour of (a) Average Fixed Cost and (b) Average Variable Cost as more and more units of a good are produced?

Or

Define Average Revenue. Show that Average Revenue and Price are same.

Answer:

(a) Average Fixed cost is defined as the fixed cost per unit of output produced. It is derived by dividing the total fixed cost produced. That is,

\[AFC=\frac{TFC}{Q}\]

As more and more units of output are produced, the shape of AFC becomes that of rectangular hyperbola. That is, AFC is downward slopping rectangular hyperbola. This is because at any point on AFC curve, if AFC is multiplied by corresponding unit of output, then we get TFC. For example, at point A in the above figure, AFC is Rs. 2.5 and corresponding output produced is 2 units, hence, TFC is Rs. 5 (i.e. Rs. 2.5 \[\times \] 2)

(b) Average Variable Cost is defined as the variable cost per unit of output produced. It is derived by dividing the Total variable Cost by quantity of output produced. That is,

\[AVC=\frac{TVC}{Q}\]

AVC is a U - shaped curve. That is, as output increases, the AVC curve falls and reaches its minimum point ?K? and the rises up. The reason behind the U-shape of AVC curve is the? Law of Variable Proportion.

Or

Average Revenue (AR) is defined as revenue earned per unit of output sold. AR is same as that of price (P) of the output (Q). Algebraically,

\[AR=\frac{TR}{Q}\]

Where, TR is total revenue

Q = Output

We know that \[TR=P\times Q\]

\[AR=\frac{P\,\,\times \,\,Q}{Q}\Rightarrow AR=\frac{P\,\,\times \,\,\,}{{}}\]

AR = P

Thus, AR is always equal to the price of the output.