A Level Economics AQA Practice Exam

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Prepare for the A Level Economics AQA Exam with our interactive quiz. Test your knowledge with multiple choice questions and detailed explanations. Equip yourself with the tools needed for success!

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What is the shape of the average cost curve?

Linear
U-shaped
L-shaped
Flat

The correct answer is: U-shaped

The average cost curve is U-shaped due to the nature of how average costs behave as output levels change. At lower levels of production, average costs tend to be high because fixed costs are spread over a small number of units. As production increases, the average cost decreases due to economies of scale, where efficiencies are gained in production processes. However, beyond a certain point, average costs start to increase again due to diseconomies of scale, where factors such as managerial inefficiencies or resource constraints come into play. This leads to the typical U-shape of the average cost curve, illustrating the relationship between output and average cost effectively. This shape is crucial for firms in determining the optimal level of production that minimizes average costs.