Discussion
With increasing level of output the Average Variable Cost (AVC) of a firm :
Answer: A
Average variable cost initially falls, then continues to rise.
AVC is total variable cost divided by output. As output first expands, the variable factors are used more efficiently with the fixed plant, so AVC falls. Beyond a point diminishing returns set in and AVC rises, giving the familiar U-shaped curve, whose minimum the marginal cost curve cuts from below.
AVC does not remain unchanged. It does not go on continuously falling; that describes average fixed cost, which falls as the fixed total is spread over more units. Nor does it rise from the start, which would ignore the early efficiency gains.
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