A bicycle repair shop has the cost structure shown in the table below. The firm\

Question

A bicycle repair shop has the cost structure shown in the table below. The firm's fixed costs are $250 per day. Complete the table below by filling in the various cost measures (perday) for each output level. Note that the average variable cost of repairing 8 bicycles is greater than the average variable cost of repairing 7 bicycles. Use the information above about another cost curve to explain why this is the case. In your explanation, state what central economic concept is responsible for an upward sloping average variable cost curve?

Explanation / Answer

Output Total FC Total VC TC AFC AVC ATC MC 1 $250.00 $75.00 $325.00 $250.00 $75.00 $325.00 2 $250.00 $150.00 $400.00 $125.00 $75.00 $200.00 $75.00 3 $250.00 $200.00 $450.00 $83.33 $66.67 $150.00 $50.00 4 $250.00 $230.00 $480.00 $62.50 $57.50 $120.00 $30.00 5 $250.00 $250.00 $500.00 $50.00 $50.00 $100.00 $20.00 6 $250.00 $300.00 $550.00 $41.67 $50.00 $91.67 $50.00 7 $250.00 $450.00 $700.00 $35.71 $64.29 $100.00 $150.00 8 $250.00 $750.00 $1,000.00 $31.25 $93.75 $125.00 $300.00 The Average Variable Cost of producing 8 bicycles is higher than the AVC of producing 7 bicycles. Average Variable Cost is increasing because the Total Variable Costs are increasing at an increasing rate. The AVC cost curve is U-Shaped and increases after reaching it's minimum because of the law of diminishing returns. The Law of Diminishing Returns describes a situation where there is decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant. A good example of why this happens is to think of a crowded factory floor where there are so many people that they are in each other's way.

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