Which of the following graphs best represents a typical average total cost (ATC) curve in the short run?

• A. A straight upward-sloping line, indicating ATC increases constantly with output.
• B. A horizontal line, showing ATC remains constant regardless of output.
• C. A downward-sloping curve, where ATC continuously decreases as output increases.
• D. A U-shaped curve, where ATC first decreases, reaches a minimum, and then increases as output rises.

Answer: (D)

Verified step by step guidance

1. Understand that the Average Total Cost (ATC) curve in the short run reflects how the cost per unit of output changes as production increases.
2. Recall that ATC is calculated as total cost divided by quantity produced, i.e., \(\text{ATC} = \frac{\text{Total Cost}}{Q}\).
3. Recognize that in the short run, ATC typically decreases initially due to spreading fixed costs over more units and increasing efficiency (economies of scale).
4. Note that after a certain output level, ATC starts to increase because of diminishing marginal returns, which cause variable costs to rise faster than output.
5. Combine these insights to understand why the ATC curve is U-shaped: it first slopes downward, reaches a minimum point, and then slopes upward as output increases.