Average variable cost
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Over an initial range of production, average variable cost declines and then reaches a minimum point. Thereafter, cost increases as the firm utilizes more of its production capacity. This higher cost results primarily from production constraints imposed by the fixed assets at higher volume levels. The minimum point on the
AVC coincides with the lowest average variable cost. However, the minimum point on the
AVC does not correspond to the least-cost quantity for average total cost. In
Exhibit 13, average variable cost is minimized at 2 units, whereas average total cost is the lowest at 3 units.
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Open itAverage variable cost (AVC) is derived by dividing total variable cost by quantity. For example, average variable cost at 5 units is (300 รท 5) or 60. Over an initial range of production, average variable cost declines and then reaches a minimum point. Thereafter, cost increases as the firm utilizes more of its production capacity. This higher cost results primarily from production constraints imposed by the fixed assets at higher volume levels. The minimum point on the AVC coincides with the lowest average variable cost. However, the minimum point on the AVC does not correspond to the least-cost quantity for average total cost. In Exhibit 13, average variable cost is minimized at 2 units, whereas average total cost is the lowest at 3 units.
Average total cost (ATC) is calculated by dividing total costs by quantity or by summing average fixed cost and average variable cost. For instance, in Exhibit 13, at 8 un Summary
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