$24 ATC COST (dolas perpair) ATC varies with the rate of output 10 20 30 40 50 RATE OF OUTPUT (pairs of jeans per day) (1) (2) (3) (4) (5) Rate of Fixed Variable Total Average Output Costs Costs Cost Total Cost H 0 $120 $120 10 120 85 205 $20.50 J 15 120 125 245 16.33 K 20 120 150 270 13.50 30 120 240 360 12.00 M 40 120 350 470 11.75 50 120 550 670 13.40 51 120 633 753 14.76 FIGURE 5.3 FIGURE 5.3 Average Total CostAverage total cost (ATC) is total cost divided by the number of units produced. In the accompanying table the ATC in column 5 is computed by dividing Total Cost (column 4) by the rate of output (column 1). Notice how ATC falls initially as output increases and then later rises. This gives the ATC curve a distinctive U shape, as illustrated in the graph. U-SHAPED ATC CURVE An important feature of the ATC curve is its shape. Average costs start high, fall, then rise once again, giving the ATC curve a distinctive U shape. The initial decline in ATC is largely due to fixed costs. At low rates of output, fixed costs are a high proportion of total costs. Quite simply, it's very expensive to lease (or buy) an entire factory to produce only a few pairs of jeans. The entire cost of the factory must be averaged out over a small quantity of output. This results in a high average cost of production. To reduce average costs, we must make fuller use of our leased plant and equipment. The same problem of cost spreading would affect a restaurant that served only two dinners a day. The total cost of operating a restaurant might easily exceed $500 a day. If only two dinners were served, the average total cost