AVC curve is 'U' shaped Curve because of the application of which concept?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Law of Variable Proportions
The Average Variable Cost (AVC) curve is U-shaped due to the application of the Law of Variable Proportions. This law explains how output changes when only one input (like labor) is varied while keeping other inputs (like capital) fixed.
According to the Law of Variable Proportions:
1️⃣ Increasing Returns Stage (AVC Falls)
- At low levels of production, adding more variable inputs leads to higher efficiency (better specialization and resource utilization).
- This causes AVC to decrease.
2️⃣ Diminishing Returns Stage (AVC Rises)
- After a certain point, adding more of the variable input leads to inefficiencies due to overcrowding, overuse of fixed inputs, and diminishing productivity.
- This causes AVC to rise, creating a U-shape.