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If new, more advanced equipment reduces the amount of labor needed to produce an increased level of output, then

  1. The AVC curve will shift upward
  2. The MC curve will shift upward
  3. The ATC curve will shift downward
  4. The AFC curve will shift upward

The textbook states the correct answer is 3, however my teacher tells me that there is another possibility.

My thinking is that it could be the 1.The Average Variable Cost will shift upwards. My reasoning is that because the new equipment adds to the cost, including ordering the equipment, installing it, maintaining it, and training people to operate it. All of that would contribute to the cost.

Am I grasping the concept of AVC correctly. And is 1. a good alternative?

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Usually capital costs are deemed fixed rather than variable costs. Probably your teacher is thinking that the AFC curve will shift upwards, although this depends on the cost of the new equipment relative to that of the old.

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