the first) costs the same low amount, then average variable
costs are also constant and equal to marginal costs. In this
case, however, average total costs decline sharply because of
the spreading of the large fixed costs. The accompanying
figure shows the cost curves for such a firm.
The MC (and AVC) curve is flat at a very low level, showing that
marginal cost is near zero for all units of output. The ATC curve
begins very high and drops sharply as output rises, and
continues falling indefinitely, asymptotically approaching the
MC curve.
One implication of this cost structure is that large sales
volumes may be necessary in order to reduce average costs
significantly. For example, suppose the fixed development cost
of a computer game is $5 million and the marginal cost on all
units is $1 per unit (the costs of processing the online
transaction). If only 200 000 units are sold, a selling price of $26