Explain how an average cost curve is affected by a change in the underlying fixed costs of production and compare the impact to how a marginal cost curve is affected by a change in the underlying fixed cost.
Answer: Because average costs include fixed costs (average over the level of output), an increase in the underlying fixed costs will shift the average cost curve up and a decrease in the underlying fixed costs will shift the average cost curve down. The marginal cost curve, however, is unaffected by a change in the underlying fixed costs so it will not change.