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The Average Cost (AC) curve is U-shaped due to the relationship between fixed and variable costs as production levels change. Initially, as output increases, average costs decline due to the spreading of fixed costs over more units and increasing efficiency through economies of scale. However, after reaching an optimal production level, average costs begin to rise as diminishing returns set in, leading to higher variable costs for additional units. This combination of decreasing and then increasing costs results in the U-shaped appearance of the AC curve.

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1w ago

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