How do increases in gasoline prices typically affect the average variable cost (AVC) for firms in industries where gasoline is a key input?

• A. AVC remains unchanged because gasoline costs are fixed in the short run.
• B. AVC decreases because firms use less gasoline when prices rise.
• C. AVC increases because gasoline is a variable input and higher prices raise production costs.
• D. AVC decreases only if the firm is operating at full capacity.

Answer: (C)

Verified step by step guidance

1. Understand the definition of Average Variable Cost (AVC): AVC is the variable cost per unit of output, calculated as \(\text{AVC} = \frac{\text{Total Variable Cost}}{\text{Quantity of Output}}\).
2. Recognize that gasoline is a variable input in the production process for firms in industries where it is essential, meaning its cost changes with the level of output.
3. When the price of gasoline increases, the total variable cost increases because the firm must spend more on gasoline for each unit produced.
4. Since AVC is the total variable cost divided by output, an increase in gasoline prices raises the numerator (variable cost), leading to an increase in AVC, assuming output remains constant.
5. Therefore, higher gasoline prices typically cause the AVC to increase because gasoline costs are variable and directly affect production costs.