Based on the below, what is the shape of the existing firm\'s total cost curve a

Question

Based on the below, what is the shape of the existing firm's total cost curve and marginal cost curve, u-shaped or l-shaped?

"Cost Structure

The cost structure around a SaaS cloud environment is associated to the cost of providing a platform and environment for customers to use.

Some of the key determinants around fixed costs are associated to the initial investment to provide a secure and reliable platform. The company will invest time and resources designing the cloud offering for customers. Once this stage is complete the company will incur on development costs which are associated to implement the design, migrate the software and source code to the cloud, encrypt and secure customer data and perform testing activities to ensure the Software is reliable for customers to use.

On the other hand, variable costs are associated to the use of the cloud offering by customers. There are cloud providers such as AWS, Azure, etc that provide the PaaS and surcharge use of VMs, Memory, 3D cards, etc. This in turn becomes a variable cost to the customer given that this cost changes as usage, volume and specific needs of customers increase/decrease. In addition, there is an associated variable cost around support for technical issues depending on the volume of SaaS cloud usage."

Explanation / Answer

Cost is U shaped.

Initially fixed cost is high then it falls as it only incurs development costassociated to implement the design, migrate the software and source code to the cloud, encrypt and secure customer data and perform testing activities.

Variable cost increases with increase in use by customers. Therefore when output increases cost increases.

So cost first falls and when customers start using cloud more cost rises.

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