The shape of the average cost (AC) shows that as production increases

The shape of the average cost (AC) shows that as production increases

Answer Details

The shape of the average cost (AC) shows that as production increases, the average cost decreases and then increases. The average cost (AC) is the cost per unit of production, calculated by dividing the total cost by the quantity produced. As production increases, the average cost initially decreases because the fixed cost is spread over a larger number of units. However, at some point, the marginal cost begins to increase, causing the average cost to increase as well. This happens because, beyond a certain level of production, the additional cost of producing each additional unit increases due to factors such as diminishing returns, increased specialization, and higher input costs. Therefore, the correct answer is that as production increases, the average cost decreases and then increases.