The short-run average total cost (ATC) curve of a firm will tend to be U-shaped because
A) larger firms always have lower per-unit costs than smaller firms.
B) at small output rates, average fixed costs (AFC) will be high, while at large output rates, marginal cost (MC) will be high.
C) diminishing returns will be present when output is small, while high AFC will push average total cost to high levels when output is large.
D) diseconomies of scale will be present at both small and large output rates.

Question

Quizplus · Accepted Answer

In the short run, ATC is U-shaped because at low output levels, AFC is high, and as output increases, AFC decreases, lowering ATC. However, as output continues to increase, MC rises due to diminishing returns, increasing ATC.

The Short-Run Average Total Cost (ATC) Curve of a Firm