A recent food craze in Brisbane has seen an increase in the popularity of doughnuts. The market for doughnuts is perfectly competitive. Gerald decides to open a single doughnut shop called Doughnut Love. He will incur fixed costs for store rent, and variable costs include operating the machinery, ingredients and wages for employees. Assume that Gerald'smarginal cost increase with the total quantity of doughnuts produced and are initially less than his average variable costs.

As the quantity of doughnuts Gerald produces in his store increases, which of the following statements aretrue:

1.Gerald's average variable costs will always remain constant.

2.Gerald's averagevariablecostwill always increase at a constant rate.

3.Gerald's average variable cost will initially be high,thenwill continually decrease.

4.Gerald's average variable cost wouldinitially decrease at low levels of production of 5.donuts and then, after a certain point, begin to increase.