Assume that a firm has five identical machines, each operating independently. Assume that with all five machines operating normally, 100 units of output are produced each day. Below what level of output will AVC and MC rise?

Cost Curves in Practice When fixed factors are divisible Are cost curves always the shape depicted in the textbook? The answer is no. Sometimes, rather than being U-shaped, the AVC and MC curves are flat bottomed, like the curves in the diagram. Indeed, they may be constant [and equal to each other] over a substantial range of output. Output Cost curves in practice The reason for this is that sometimes fixed factors may not have to be in full use all the time. Take the case of a firm with 100 identical machines, each one requiring one person to operate it. Although the firm cannot use more than the 100 machines, it could use fewer: in other words, some of the machines could be left idle. Assume, for example, that instead of using 100 machines, the firm uses only 90. It would need only 90 operatives and 90 per cent ofthe raw materials. Similarly, if it used only 20 machines, its total variable costs (labour and raw materials] would be only 20 per cent. What we are saying here is that average variable cost remains constant and over a very large range of output: using anything from 1 machine to 100 machines. The reason for the constant AW: [and MC) is that by varying the amount of fixed capital used, the proportions used of capital, labour and raw materials can be kept the same and hence the average and marginal productivity of labour and raw materials will remain constant. Only when all machines are in use (at Q1] will AVC start to rise if output is further expanded. Machines may then have to work beyond their optimal speed, using more raw materials per unit of output [diminishing returns to raw materials], or workers may have to work longer shifts with higher (overtime) pay. Case 5 - Question A 1. Assume that a tirm has five identical machines, each operating independently. Assume that with all five machines operating normally, 100 units. ofoutput are produced each day. Below what level of output will AVC and MC rise