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Bob Edwards owns Bob's Bagels
Bob Edwards owns Bob's Bagels. He hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that there are two factors that cause the ATC curve to be U-shaped. One factor is the existence of diminishing marginal product, which causes it to rise.
What is the other factor? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost.)
Expert Solution
The other factor is the decreasing average fixed cost. The average cost fixed cost decreases because while the fixed cost is the same at all levels of production, the number of units increasing causes the average fixed cost to fall. As long as the fall in the average fixed is more than the rise in the average variable cost, the ATC curve is U-shaped.
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